Q2 2022 Invacare Corp Earnings Call

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Good morning, ladies and gentlemen, and thank you for standing by welcome to the <unk> second quarter 2022 conference call and webcast. After the management ABB, we will open the call to questions.

And analysts interested in asking a question of when each dial in as 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 Tuesday August nine 2022, I will now turn the call I was mostly <unk> director of Treasury Investor Relations and corporate communication.

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 second quarter 2022 financial results and providing investors with an update on our business outlook.

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 at global Dot <unk> Dot com with Investor 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 second quarter earnings release.

For an explanation of the items discussed on today's call that are considered 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 during the second quarter, we achieved sequential improvement in adjusted EBITDA as our strategic actions begin to positively impact performance.

In particular, the improved results were driven by lower SG&A expenses and strong improvement in gross margin due to increased pricing effectiveness and favorable product mix.

While input costs remain high we are seeing a greater impact from pricing actions as costs are somewhat less volatile.

In addition, free cash flow turned positive a significant improvement compared to both the prior year and sequentially.

<unk> was driven by lower working capital as our cash conversion cycle improved driven by improved cash collections and reduced inventory.

Looking at revenue for the quarter, we achieved sequential growth in mobility and seating products driven by increased adoption of our compelling product portfolio.

A testament to our culture of innovation, we're proud to once again received industry recognition and many categories for outstanding products and technology, and our mobility and seating category sales.

Sales of lifestyle and respiratory products were impacted by continuing component supply chain challenges issues, you are better positioned to address today, and which I will discuss further momentarily.

At the same time, we continued to experience elevated order backlog across all product categories and regions and see strong demand in mobility and seating and lifestyle products.

Backlog for respiratory products remains elevated sales are anticipated to normalize in the next several quarters to pre pandemic levels.

<unk> related demand for these products.

Based on improvements in our business performance. We're pleased to have secured additional capital after second quarter, which provides increased liquidity and flexibility.

We expect the strategic funding will enable us to more effectively work with our suppliers and find alternative solutions to short term supply constraints, which will help us more quickly convert backlog of customer orders to sales.

And accelerate transformative plans to drive long term profitability.

We anticipate the additional liquidity will also enhance our transformation plan to optimize credit portfolio physical footprint lower operating costs and improve operating leverage.

As you are in the early stages of deploying the additional capital we look forward to providing updates in the coming quarters on how these actions are anticipated to drive profits and enhance shareholder value.

Overall, we are seeing favorable trends across the business, despite a challenging macroeconomic environment, the cost and availability of input.

We have more work to do we are confident that we have the right tools the right team and the right balance sheet to drive sustainable long term results.

I'll now turn the call over to Kathy who will provide a more detailed financial summary.

Thanks, Matt turning to slide five.

On a year over year basis reported and constant currency net sales declined as continued supply chain challenges and component availability.

That said our ability to efficiently serve our heightened demand.

Gross margin was impacted by higher input costs intermittent product stoppages due to supply chain challenges and unfavorable foreign exchange, partially offset by the benefit of pricing actions.

Constant currency SG&A expense decreased primarily due to lower employment costs.

Actually offset by higher IC costs classified as operating expenses as we temporarily paused any further ERP rollout similar to the first quarter of 2022.

As a reminder, the cash cost of the ICU modernization program remains unchanged.

Operating loss increased in adjusted EBITDA decreased due to lower gross profit from lower sales.

Higher restructuring costs and expenses recorded as SG&A expense.

As Matt noted free cash flow turned positive for the quarter, an improvement of $27 $3 million driven by strong management of accounts receivable and inventory.

Turning to slide six looking at our performance on a sequential basis.

<unk> net sales decreased 6% in constant currency net sales decreased three 2%.

Growth in mobility and seating products was achieved in all regions driven by higher sales of powered mobility products.

Sales of respiratory and lifestyle products declined as a result of the aforementioned supply chain challenges with limited the company's ability to fulfill orders and reduce the elevated order backlog.

Despite softer sales gross margin increased 160 basis points sequentially driven by favorable pricing actions.

As previously noted there is a lag between the impact of higher input costs and the effectiveness of pricing actions and we anticipate sequential gross margin improvement as cost stabilize.

Constant currency SG&A expense decreased sequentially, due primarily to lower product liability costs.

Actually offset by higher stock compensation expense.

Overall, our cost structure is expected to improve as we realize the benefit of previously announced actions to reduce SG&A expense, but the majority of the benefits starting in the second half of the year and into 2023.

Operating loss and adjusted EBITDA improved driven by higher gross profit and lower SG&A.

Free cash flow generation for the quarter was <unk> $1 million, an improvement of $30 million driven by reduced working capital primarily the benefit of a shorter cash conversion cycle favourably impacted by accounts receivable and inventory.

Turning to slide seven as Matt mentioned, we anticipate the additional liquidity.

<unk> is supply chain constraints by allowing the company to expedite key raw materials and components.

On board additional supplier.

And take internal actions to redesign products to mitigate supply constraints.

For the second half of 'twenty to adjusted EBITDA is anticipated to improve compared to the first half of the year driven by gross profit improvement was the benefit of favorable product mix and price effectiveness as well as lower operating expenses.

As anticipated demand for respiratory products is expected to lessen in the next several quarters given less COVID-19 related demand.

Given the ongoing supply chain challenges and increased inflationary pressures. The company has suspended its full year 2022 financial outlook.

The company will provide updates in the coming quarters on the planned deployment of recently announced funding and an additional transformative actions as circumstances evolve.

I will now turn the call back over to Matt.

Thanks Kathy.

We were pleased to see the beginning of positive trends such as the sequential improvement in profitability expanded gross margins and lower operating expenses.

While the second quarter was challenging in many ways underlying markets. We serve remain healthy growing and we continue to experience strong demand and elevated order backlog is.

As part of our overall plan to evolve the business the additional liquidity.

Further planned actions are expected to improve near and long term results and ultimately enhance shareholder value.

Thank you for your continued support of Invacare and for taking time for this morning's call will now take questions.

Thank you if you would like to ask a question today. Please press star followed by one on your telephone keypad. If you choose to withdraw your question. Please press star followed by chain when preparing to ask a question. Please ensure youll find is in nature lately and our first question today comes from Bob Willoughby of Cvs Securities. Please go ahead. Your line is open.

Yeah.

Yes, hi, good morning, it's Pete Lucas for Bob.

I guess, starting off with seating and mobility sales hi, how are you.

In terms of seating and mobility ability sales I guess it looks like the main driver. There was powered mobility can you kind of discuss what's impacting sales. The most is that access and sales and the outlook. The most is it access to patient market share product lineup and what can.

The focus to improve the revenue base there.

Sure.

Yeah, I'd say, a little bit of all of the above the market continues to be really strong summer months are typically months, where we have people getting out and want to emulate the doors.

How much of your business. So that's when the season, we have a great new rear wheel drive power wheelchair that's doing it.

Well in the marketplace a lot of benefits for that drive style.

The newest product so that tightens the market a lot of interest there.

And so looking at just North America would you say that's probably the.

Would be the biggest driver in terms of product segments for North America.

But right now yes.

I'm interested in power mobility.

And then last one for me in terms of the supply chain. If you could you touched on in your remarks, I think you mentioned liquidity, helping with access to components. If you could just kind of maybe give us a little more detail on the biggest bottlenecks you're facing in kind of.

The goals to improve those.

It kind of depends.

Today, we really need a 100% of the components available for a bill material to ship product for you it sounds obvious but on any given day supply chain challenges include things that are slightly delayed taking up all the inventory minus one part waiting around to finished product.

Our suppliers are having other kinds of challenges getting their own material. We can help in some cases, we view that with liquidity.

Paying a small premium or paying for expedited freight can make that up where it makes sense, we try not to do that very often but sometimes.

Thats helpful and we want to make sure that we're top of mind with our vendors in terms of.

Working together to keep the supply chain moving.

Helpful All of that so.

I think well well costs through our inputs are high not just the materials, but definitely labor, especially freight.

You see less volatility right now so prices remain elevated and that helps us work with our customers and in the marketplace in general.

Sorry, what the prices we need in the marketplace to cover these extraordinary costs are when that makes for more normal operations, that's helping too.

Very helpful. Thanks.

Okay. Thanks.

Thanks, Steve.

Thank you and as a reminder, if you would like to ask a question today. Please press star followed by one on your kind of think he packs now.

And our next question comes from Matthew Mission of Keybanc. Please go ahead. Your line is open.

Hey, guys. This is Brad nourishment on today from Matt. Thank you for taking the questions.

Starting off I was hoping you guys could provide a little more color around the strategic funding you raised in July .

Maybe just touching on some of the key consideration factors as you went through the process that Mike why this was the best outcome and decision to brand the cure.

Okay.

Yes. Good question, Bret, we continue manage operations and the balance sheet and our whole business in total as we look at the opportunities to make investments to restructure the business and organize ourselves in a way but.

We will deliver efficient operations and the supply chain environment, our ability to do that sooner than later is going to yield better results better NPV. So we wanted to do that we also needed to bring some flexibility to operations to keep the supply chain going and convert this demand we continue to have.

Really great interest from customers on our products in all categories and regions and we needed to take some steps to make sure that thats converting from backlog orders to sold orders as quickly as possible.

Given the uncertainty in the debt markets and other factors. We conducted a process would that result, which is a good liquidity that can help the business here.

Alright, I appreciate that color and then just moving to some of the near term trends, you're seeing around revenue and margin just thinking about pricing and some of the benefits and that benefits you may be seeing from that I think last call you described pricing generally offsetting some.

Some of the product discontinuation you've made is this is it.

Like a decent way to look at it and thank you all.

Overall benefit to growth or is there like a different way that we should be thinking about it at this point.

Yes, two different things here.

Disentangled. So we're eliminating some products that are just too difficult to produce to procure parts for doing this quite some challenged we're migrating those to a narrower selection of product and still offer the same clinical benefit.

Tantalum 23 colors were down to fewer than 23 colors, because thats an idea of whats easier.

And that's a that's a big part of what we're doing in the supply chain.

Alright, and then just following up on.

The benefit from pricing.

Maybe if you could just provide a little more color on how much of a tailwind it's been like how much it's been able to offset some of the increase increased cost just in.

Just any more detail on that.

Yes, yes.

Second the other.

The other part of your answer was.

Pricing isn't offsetting product discontinuation, Craig pricing is really helping us try to keep up with increased input costs.

And as you might remember from first quarter, we had about a 410 basis point of gross margin gap increase because cost to us we are increasing faster than prices to our customers.

This last quarter were about 160 basis points, better and closing the gap to.

To do that so.

Working with our customers.

Would it be possible to pass through costs that we just can't defray it any other way so the pricing related to costs and then we have revenue from substitute products, where our continuing products offsetting loss revenue from what we are.

Not producing at this time.

The other item I would highlight.

The other item I would just highlight is that sequentially, we did see an improvement in the margin.

And that primarily is related to the effectiveness of pricing as we continue through the year, we spoke about on our previous call.

In Q1, we would have fulfilled orders that would have been at old pricing that would have existed in the backlog and so we are seeing.

On more effective pricing.

Our regiment in the second quarter, which is helping to offset the higher cost base that we have as well.

Alright. Thank you very clear. Thank you for that detail and then last question from me I think you mentioned on the call that the.

The ERP implementation remains temporarily paused I was just wondering if you could provide an update on where it stands and when do you may be able to resume that initiative. Thank you for taking my questions.

Sure. Thanks, Brett So in North America, we've got to earn our updated ERP system on the front end of nearly all of the business.

Some of the highly configured products.

Pause before doing we've got a fair amount of reorganization to do and where our facilities are in where certain products are made.

We wanted to pause on investing in our current footprint, which would only be redone based on how our footprint is revised and we think that will take a couple of quarters to resolve.

And then once we have that template created in North America that will be deployed globally.

Again, I think as Kathy mentioned in her remarks.

The contract we have with our our systems integrator.

Fixed monthly fee the difference for us is whether the capitalized during the development phase and subsequently depreciated over the life of the product.

It's all expenses within the period, the cash cost in any given period.

Susan.

Alright, Thanks again for taking the questions.

Alright, Thanks Luke.

Thank you and we currently have no further questions. So I'll hand, the call back over to Matt Monaghan for any closing remarks.

Okay. Thanks, Matt and thanks to everybody for taking time this morning, Kathy Lois and I are available pretty follow up questions, which according to lower fleet count.

Contact information is on our website.

And the care Dot com under Investor relations, Thanks, very much.

Thank you. This concludes today's call. Thank you all for joining you may now disconnect your lines.

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