Q1 2022 Invacare Corp Earnings Call
And I'm just interested in asking questions will need to dial in as questions cannot be submitted by the webcast for the first part of the cool all phone lines have been placed on mute. This conference is being recorded Tuesday May 10, 2022, I will now turn the call over to Leslie and because director of Treasury Investor Relations and corporate communication.
Yeah.
Yeah.
Thank you.
Joining me on today's call from Invacare are Matt Monaghan, Chairman, President and Chief Executive Officer, and Kathy Lenahan, Senior Vice President and Chief Financial Officer.
Today, we will be reviewing our first quarter 2022, finance results and providing investors with an update on our full year outlook.
Investors follow along we have created slides to accompany this webcast.
For those dialing in you can find the link to our webcast slide presentation at global that Invacare Dot Com Slash Investor desk relations further information can be found in our SEC filings.
Before <unk> again 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 first quarter earnings release.
For an explanation of the items discussed in today's call that are considered to be non-GAAP financial information such as constant currency net sales.
Constant currency SG&A free cash flow and adjusted EBITDA. Please see the notes in the appendix of our webcast slides and in the related reconciliations in the slides and earnings release posted on our website.
I will now turn the call over to Matt Monaghan.
Thank you Louis and good morning.
Beginning on slide three we started 2022 with strong revenue growth led by sales of mobility and seating as new high value products gained traction with customers.
Pandemic related health care access continued to improve.
Crude by strong demand across all our product lines and regions and continued elevated backlog, reflecting the strength of our portfolio.
Our innovation engine, which didn't stop during Covid has continued to produce new compelling products to drive strong demand.
At the same time and as noted in our fourth quarter 'twenty, one release, we anticipated temporary challenges.
Challenges will negatively impact gross margin in the first quarter.
To address this we've emphasized our more clinically valuable products and discontinued parts of our product ranges that support in the current environment.
We've instituted price increases to offset higher costs, and we've taken steps to optimize value to our customers like aggregating orders and moving shipping locations.
In addition, we expect to take further actions this year that will improve operating results, we anticipate the benefit of mix shift and pricing actions to be increasingly impactful in the sequential quarters.
Overall first quarter results were in line with our expectations, reflecting the seasonality of our business and the time lag of mitigating actions.
Turning to slide four after a deep strategic review of our current projects and processes and with the assistance of third party experts, we've identified opportunities to improve our business to better serve our customers and to yield better results.
These can be broadly classified in three core areas first as we announced last week, we've taken actions to streamline our operations and lower costs by simplifying the organization, especially leveraging technology to eliminate noncore administrative processes.
Actions taken year to date through early May are expected to provide a benefit of approximately $6 million in 2022, and approximately $9 million on an annual run rate basis.
Overall once restructuring actions are completed we anticipate a benefit of approximately $11 million in 2022, and at least $20 million in annual run rate basis.
This will be funded by restructuring costs of approximately $15 million to be incurred and paid in 2022.
With a strong track record of simplifying the organization, while lowering cost to serve as a result, SG&A expenses are expected to decline meaningfully in the second half of the year.
Second turning to product mix, we're focusing on the parts of our product ranges with higher clinical value, we can deliver more efficiently.
This is expected to drive favorable sales mix reduce complexity and lower cost, which is critical in the supply chain environment.
And bind with pricing actions to offset higher costs, we expect significant uplift in gross profit for the remainder of the year.
The expected benefit across Europe , and North America is approximately $21 million in 2022.
Even through Covid, we continued launching new products with compelling clinical value in all product categories.
These products have been well received by our customers and are expected to drive incremental sales growth.
This will give us a strong foundation to narrow product lines. This year and still achieved solid sales results. We anticipate a net benefit of approximately $3 million for the remainder of the year.
In addition, further opportunities to simplify our organization are expected to reduce SG&A expense related to administrative and other spending.
We expect these actions will drive sequentially, improving financial results, enabling us to achieve full year guidance of higher adjusted EBITDA and free cash flow in the prior year.
I'll now turn the call over to Kathy for a more detailed financial summary.
Thanks, Matt turning to slide six and our consolidated results.
<unk> net sales increased two 4% and demand trends remained strong.
Constant currency net sales increased six 4% led by Europe with 11% growth as a result of double digit increases in sales of lifestyle and mobility and seating products.
North America achieved nearly 12% growth in mobility and premium products, primarily attributable to power wheelchairs.
For respiratory products, we saw similarly strong demand, but continued supply chain disruptions delayed quarterly sales due to the availability of components.
Gross profit as a percentage of net sales declined as the benefit of price increases was more than offset by higher input costs, including material and freight costs as well as unfavorable variances.
I'd remind you that these inflationary costs were largely absent in the first quarter of last year.
For example contain our costs for products shipped from Asia to the U S. In the first quarter of last year were approximately $8000 for a 40 foot container that same shipment in the first quarter. This year was $20000 or two five times the cost.
Similarly, the price of steel has more than two times the price we paid in the first quarter of last year and is a significant input cost for products like that.
And wheelchair.
These macroeconomic issues are not unique to invacare due to the essential nature of our products and critical equipment. We provide the market is supporting price increases to mitigate higher input costs, which have been implemented not only by us but also our competitors.
In addition, we anticipate favorable sales mix emphasizing products that provide higher clinical value, which support higher selling prices as we progress during the year.
While gross profit reflected higher average selling prices the benefit was muted by the fulfillment of orders and backlog at oil pricing and the timing of the effectiveness with customer contracts.
We expect the actions we have undertaken to become increasingly more effective as the year progresses and positively impact margin.
At the same time issues of are more temporary in nature also impacted margins during the quarter.
Previously guided during our fourth quarter 2021 release.
Crime related absenteeism, coupled with a lack of available components led to operational inefficiencies.
In addition, we saw unfavorable product mix as we continue to optimize our product portfolio and sell off low margin inventory.
Constant currency SG&A expense increased primarily due to costs classified as operating expenses as we temporarily pause any further ERP rollout with consideration of the restructuring and strategic actions to be implemented by the company.
Previously these costs would have been classified as capital expenditures.
We anticipate higher levels of SG&A expense will continue through the second quarter of 2022 related to this classification change.
Importantly, the cash cost of the IP modernization program remains unchanged.
As Matt mentioned, our cost structure is expected to decrease as we realize the benefit of strategic actions, which are anticipated to reduce SG&A expense going forward, especially for the second half of the year.
For example, in North America more than 40% of our orders are now processed automatically as customers enter orders directly via e-commerce tools available in the system.
In addition, a large portion of quotes and orders if received by E mail or fax can now be automatically uploaded to the system.
This has significantly reduced the amount of manual intervention and reduces our cost to serve while improving the customer experience.
Early feedback from customers and associates has been favorable and we expect additional efficiencies as they become more familiar with the enhanced tools at their disposal.
Operating loss and adjusted EBITDA were both lower due to decreased gross profit and higher SG&A expense.
We also recognize restructuring charges of $3 8 million in the quarter.
The restructuring actions taken in the first quarter are expected to generate annual run rate savings of $3 million with approximately $2 million to be realized over the remainder of the year.
Free cash flow usage for the quarter was $29 $8 million, primarily to fund the operating loss and the payment of customer rebates and accounts payable.
This was in line with historic seasonality as the company generally consume cash in the first half of the year and generates cash in the second half of the year.
We expect this trend to continue and be amplified as we realize the benefit of effective pricing and restructuring actions to improve the profitability and free cash flow along with the benefit of working capital converting to cash and the remainder of the year.
As guided we expect free cash flow to improve sequentially throughout 2022.
Turning to slide seven we are reaffirming our full year guidance with improvement in both adjusted EBITDA, excluding the benefit of the cares Act loan forgiveness in 2021.
And free cash flow compared to the prior year.
In addition, we anticipate sequential improvement in both key metrics in the last three quarters of the year as effective pricing offset higher costs and favorable product mix with the benefit of restructuring actions are realized.
Reported net sales for the year are anticipated to be flat to down 1% to 2% compared to last year as we continue to optimize the product portfolio, partially offset by the introduction of new products and the benefit of pricing actions.
I will now turn the call over to Matt.
Thanks Cathy.
Before we conclude today I would like to thank our associates who've worked so hard to ensure we continue to make progress and serve our customers. Despite many challenges in the past few years, we delivered vital health care solutions by being flexible and reactive to the ever changing environment. In 2022, we're taking actions to reset how we work to address persistent market conditions more easily.
As the year progresses, we look forward to providing updates on other transformative change is expected to generate profitable growth in 2022 and beyond overall, we remain confident these actions will drive durable results and greater shareholder value. Thank.
Thank you for your continued support and for taking time for this morning's call will now take questions.
No.
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And our first question today comes from Matthew Mission of Keybanc. Matthew. Please go ahead. Your line is open.
Hey, guys. This is Brad Fisher and on today from Matt. Thank you very much for taking the questions.
Starting off I know you touched on it a little bit in the remarks, but just given there's two different components of the restructuring program you've announced can you just lay out.
Nearly when do you expect to realize the expected savings through 2022 and into 2023, just for our modeling purposes.
Kathy why don't you hoped with precision on Tommy breadth. They actually started so obviously things that we've announced in the 8-K that we deal with year to date actions will anniversary through practically all of this year and then you could.
Roughly do the math on what's left to achieve this year.
In the first quarter of 2022 actions will continue through fourth quarter based on the tools that we.
Evolve that will allow us to be more efficient and to operate with lower costs.
Okay.
Are you more precision to that for you.
Yes, so for the actions that we've already.
Implemented and announced we would see a very small benefit in Q2.
A majority of the benefit would be in Q3, and Q4, just given timing of notifications to employees and when those employees would see.
Bookings for the company.
Actions were taken both in Europe as well as in North America. The benefits are seeing quicker in North America versus Europe , just given timing of notification periods.
So primarily and as we've spoken about previously the majority of the restructuring savings that would be announced this year, we would see in the second half of the year and Thats whats going to drive a reduced SG&A structure as well as improvement in the margins for the second half of the year.
Okay.
Alright, I appreciate that color and then just thinking about some of the elevated costs youre seeing around the supply chain with freight materials have you started to see any level of improvement there in April and early may or or is it still kind of status quo versus the first quarter.
The more important improvement for us honestly is the volatility.
Mrs are elevated but stable then we and our customers and markets generally can absorb those kind of changes what were really tough and in 2021 in the first quarter of 2022 has been just the rate of change I think it's slowed down a little we've even seen some temporary improvements in cost more before before.
The invasion of Ukraine, and after where things like steel and diesel fuel has gone back up.
But the 2022 looks a little more predictable we talk to our suppliers, we can see a little bit farther out on availability and cost.
US work more easily with customers.
Sure.
Deal with the issues that higher cost affect everyone.
So that feels better.
Volatilities in the actual specific price of things.
Alright, and then last lastly from me just thinking about the free cash flow dynamics, I think you alluded to improved profitability as one of the key drivers there, but just thinking about some of the other moving pieces is there anything you'd call out that gives you confidence in.
Hitting hitting the directional guidance of improvements year over year, maybe maybe.
With the specific lines around some of some of the working capital moving pieces. Thank you.
Maybe Kevin can join me here on the on a joint answer I think you'd see results have improved as.
As we get into year end.
Finish up the implementation early in the year.
In North America for the functionality that we've deployed.
We've got new tools that are helping with planning and RV sales inventory operations processed for material management.
We're seeing results of inventory that are looking favorable in those tools.
Lower volatility, which requires giving up as part of the confidence for working capital this year.
Ed.
Yes, I think the key is on the seasonality, we do have a various seasonal free cash flow.
You anticipate free cash flow will improve sequentially for the last three quarters of the year that is driven by the improvement in the profitability, but also an improvement in working capital primarily inventory, we still have a significant investment in inventory in our balance sheet and we do anticipate that a portion of that will turn to cash in the year.
Alright, thanks, guys.
Sure.
And as another reminder, if you would like to ask a question. Please press star followed by the number one on your telephone keypad.
And our next question comes from that.
<unk> of CJS Securities. Please go ahead your line is open.
Hi, Good morning, it's Pete Lucas for Bob.
Just to start with a two part question one if you could discuss in a little bit more detail North American pricing and volume in Q1, and your assumptions for the year and then in terms of pricing can you kind of discuss how that works or reimbursement rates going up or do you take price and that comes out of pocket.
Kathy once you take the first part of the.
Yeah.
Yes, so we've given guidance for the consolidated company in regards to revenues.
Do anticipate for the year that revenues would be down 1% to 2%.
And that does include the benefit of pricing actions that are being taken in Europe as well as in North America.
And it would be offset by the product discontinuation that we would have to eliminate products that no longer meet.
A certain threshold our profile.
That same concept would be true in North America, as well probably more more so on the discontinuation side of the house.
But we would anticipate on a consolidated basis as I mentioned that revenues would be down roughly 1% to 2% on a reported basis.
And then reimbursement levels, depending on the country on a product category.
Have shown some flexibility in the United States, there's been some moderate or minor uplift fueling to account for inflation.
Certain agreements in place around the world with customers that give us the <unk>.
Reising adjustment based on a basket of factors.
There was the Georgia the marketplace generally some customers don't get direct reimbursement for our product will put the product in our fleet, which gets reused over a long period of time, where immature durability.
Total costs and the net reimbursement that they get a true monthly rental fee or something like that for the product. So it's more indirect.
Yeah.
Great and just sticking with pricing how much pricing do you need to get parity on products and how often do you did the prices get set and how often do you see changes in the reimbursement.
While you can see the level of margin compression that we've had this quarter, which reported on it on the past few quarters and Thats really just the simple mechanism.
The lag between when we see higher input costs.
And when we're able to translate that into price changes to our customers Thats normally a 90 day process depends on a lot of local differences.
So you would imagine that we need to do.
Nothing pricing to offset those costs. In addition to the actions we take can be more efficient and cost effective in how we convert materials too.
Finished goods for our customers. So that's that's the basic equation I think we've seen.
Very constructive dialogue with customers and reimbursement agencies on how this all works no one's immune from the cost increases that we're seeing steel diesel plastics.
Transportation of all forms and so it's just a matter of remaining competitive and I think the invacare advantages, we can normally demonstrate pretty conclusively. The total cost of ownership is lower when someone buys.
And in the care product and puts in your fleet because they are more reliable and tend to last longer with less refurbishment or less unreimbursed servicer overtime. So thats the value equation that continues to hold strong for our company and allows us to engage with customers to keep growing the business. In addition, we continued to rollout new products that meet our margin profile, they're designed to go to.
The supply chain, the modern supply chain more effectively.
A really compelling value exchange in the clinical setting so.
The equation here.
Great. Thanks, and just one more if I could.
Terms of the product portfolio changes that you've made can you maybe give us a few examples of some of the bigger changes that are impacting margins and revenues.
We are typically looking at each range and their clinical leading to value. So in beds, we have more and less valuable products, which also have more than less.
Price for customers to do more in fewer things for customers and our clinical way, but if you took a bed for example on average low end bed or a high end that is roughly the same amount of steel in it so when the price of steel doubles or triples.
Triples, you have a different problem to solve by passing that on in a low value bed or a high value bed, which might have 10 times the price in the marketplace. So it's a.
An easier opportunity for us to talk to customers about making those adjustments at the high end and those are in every product category, we have simple and complex bed component complex braiding, a simple and complex respiratory products in mobility and seating solutions and our sales team and clinicians and everyone is really working naturally in concert.
Lines are the higher value things that can be delivered in the market in these inflationary times.
Great. Thanks, I'll jump back in the queue.
Okay. Thanks.
Thanks, Steve.
Thank you the county have no further questions. So as a final reminder, if you would like to ask any questions or follow ups. Please press star followed by number one thank you Pat now.
We currently have no further questions. So I'll hand, the call back over to Matt Monaghan for any closing remarks.
Okay. Thank you <unk> and thanks to everyone for your time on the call. This morning, Kathy Lois and I are available for any follow up questions that you recorded your lowest Lee and good day.
Thank you ladies and gentlemen. This concludes today's call. Thank you all for joining you may now disconnect your lines.
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