Q3 2022 Invacare Corp Earnings Call

[music].

Good morning, ladies and gentlemen, and thank you for standing by welcome to the indicated third quarter 'twenty to 'twenty two conference call and webcast. After the management overview, we will open the call to questions.

Doesn't analysts interested in asking questions will need to dial in.

<unk> cannot be submitted via the webcast.

First part would be cool all phone lines have been placed on mute. This conference is being recorded Tuesday November eight 2022.

I will now hand over to let me see if the cats director of Treasury and Investor Relations. Thank.

Joining me on today's call from Invacare are Jeff Burt Hill, interim President and Chief Executive Officer, and Kathy Monahan, Senior Vice President and Chief Financial Officer.

Today, we will be reviewing our third 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.

Those dialing in you can find a link to our webcast slide presentation at global Dot <unk> Dot Com Slash Investor Dash relations further information can be found in our SEC filings.

Before Jeff 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 statement included on the second page of our webcast slides and in our third quarter earnings release.

For an explanation of the items discussed on today's call are considered to be non-GAAP financial information such as constant currency net sales constant currency SG&A expense 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 to our website I will now turn the call over to Jeff <unk>.

Thank you Lois and good morning, everyone before we begin I'd like to say how pleased I am to be here. This morning, while I'm new to the CEO role I have thing within the case for 12 years at various roles of increasing responsibilities and I am very familiar with our products customers and markets.

I have enjoyed travelling around the organization and meeting as many associates as possible and I want to thank them for all of their hard work.

<unk> believes that invacare has a central role to play in improving the quality of life for our end users.

Providing home health care solutions that Mike loss experience as possible.

Just over two months ago, I was named interim President and CEO .

Since then the company has acted on various strategic initiatives to strengthen the business and return to profitability.

I am excited about the many opportunities ahead to further optimize the business performance.

As you can see on slide three in late July and early October we increased our financial flexibility by securing $86 million.

Additional financing a portion of which was used to unlock the supply chain.

As Cathy will explain in more detail later.

Third quarter revenues were impacted by supply chain challenges and component shortages due to supplier delivery hubs, which have since improved.

Early in the fourth quarter, we have already seen the benefit of this additional liquidity and expect to deliver sequential growth in our key metrics for the full quarter.

We continue to work hard to regain the confidence of that customers and the trust of their vendors as we navigate through these challenges.

Turning to our transformation plan, we have spent the better part of the year, taking a hard look at every aspect of our business, leaving no stone unturned as we position <unk> for the future.

After carefully evaluating our strategic options and core revenue streams, we have determined that the lifestyle and mobility and seating product categories, which have experienced 30% more open orders since the end of last year.

Core to improving in the case growth and profitability.

As a result, we are discontinuing production of respiratory products by the end of the year.

We will continue to support the respiratory parts and services needs of our customers and on our respiratory related warranty and regulatory obligations.

As previously guided sales of respiratory products are anticipated to decline further given excess supply in the market and lower COVID-19 related demand.

Combined with higher input costs, and inflationary pressures respiratory products no longer meet our minimum profitability targets.

Turning to our board we have added three new directors, who have deep expertise in business turnarounds.

We look forward to working closely with our full board as we continue to navigate through our transformation.

In summary, we are committed to taking necessary and decisive action to accelerate the execution of our multi faceted strategic plan and increase shareholder value.

We have made great progress in just a few months' time as the actions we have taken so far already driving sequential revenue and profitability improvements in early fourth quarter.

Turning to slide four as I mentioned earlier, we are updating our strategic priorities to focus our resources on those categories, which have the highest potential.

Our core product categories of block style of mobility and seating continued to experience strong demand and orders.

These products are a growing market with favorable demographics and reduces the complexity of the supply chain overall.

Our fully refreshed line of award winning products are driving great customer interest and deliver important end user benefits.

We anticipate that by streamlining operations to focus on our core categories.

It will improve product mix expand gross margin reduce our cost to serve and ultimately drive higher profitability and increase shareholder value.

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

Thanks, Jeff.

Turning to slide six consolidated reported net sales declined across all main product category primarily.

Primarily due to supply chain challenges, including component shortages.

Limited, our ability to manufacture products and fulfill existing orders within the quarter.

These issues have substantially improved so far in the fourth quarter.

In addition, as approximately 60% of our revenues are earned outside of the U S.

Reported net sales were significantly impacted by unfavorable foreign exchange.

Given the strength of the U S dollar.

In Europe more than half of the decline in reported net sales was due to unfavorable foreign exchange with the remainder due to the aforementioned challenges.

Year to date Europe has achieved modest constant currency net sales growth despite the third quarter anomaly.

In North America revenues declined in all product categories, but most significantly in respiratory products as anticipated.

Turning to our core products open orders for our lifestyle and mobility and seating products were $80 5 million at the end of the third quarter as compared to $65 million at the end of last year.

Open orders remain elevated due to global component shortages, primarily electronic components and other key input material.

Supply chain challenges and supplier delivery.

Gross margin decreased due to higher input cost intermittent production stoppages due to supply chain challenges and component shortages.

And unfavorable foreign exchange.

Partially offset by the benefits of pricing actions.

Notably margins were impacted by 510 basis points from the write down of $8 $7 million of inventory and purchase obligations related to the decision to discontinue production of respiratory products.

As Jeff previously mentioned.

Constant currency SG&A expense increased primarily due to higher it costs classified as operating expenses as we pause any further ERP rollout similar to the first half of 2020 to parse.

Partially offset by lower employment costs.

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

Operating loss increased and adjusted EBITDA decreased due primarily to lower sales.

Inventory and purchase obligation write downs related to the discontinuation of the respiratory product line and.

An unfavorable foreign exchange.

As anticipated the company utilized a portion of the proceeds from the financing transactions to help unlock the supply chain and.

An accelerated transformation initiatives.

We expect to see a sequential improvement in adjusted EBITDA as we begin to convert open orders more efficiently into sales.

While the third quarter was challenging the underlying markets, we serve remain healthy and growing and we continue to experience strong demand in orders for our lifestyle and mobility and seating product category.

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

Ported net sales decreased nine 8% with declines in all product categories due to the previously mentioned supply chain challenges and.

And unfavorable foreign exchange of 3%.

Early in the fourth quarter, and thus far we have seen the flow of incoming materials in Peru.

As proceeds from the incremental financing were used to unlock the supply chain.

Constant currency SG&A expense decreased $3 $3 million sequentially, driven by lower employment costs.

Overall, our cost structure is expected to improve as we realize the benefits of previously announced actions to reduce SG&A expense with further actions to be enacted.

Operating loss increased and adjusted EBITDA decreased due to lower gross profit from lower revenues.

With operating loss also impacted by the write down of inventory and purchase obligations related to the discontinuation of the production of respiratory products.

Free cash flow usage for the quarter was $25 million to fund the operating loss and reduced accounts payable.

Turning to slide eight.

Early in the fourth quarter, we have begun to see the favorable trends, which bode well for the remainder of the year.

As a result of our incremental financing we have seen improved access to key materials and components.

On a consolidated basis, the company expects to see sequential constant currency net sales growth in the fourth quarter.

Adjusted EBITDA is also anticipated to improve sequentially driven by revenue growth.

Here gross profit attributable to the increased effectiveness of pricing actions.

Improved operational efficiency.

And restructuring benefits, partially offset by unfavorable foreign exchange.

Through the first two months of its fourth quarter Europe is on pace to deliver sequential constant currency net sales improvement.

Positive adjusted EBITDA for the quarter.

The company anticipates it will incur additional restructuring charges for North America in the fourth quarter.

As it focuses on improving the profitability of this segment for the long term.

We believe the transformation initiatives, we have already executed in addition to future actions will support continued improvement in our financial performance.

I will now turn the call back over to Jeff.

Thanks Kathy.

Turning to slide nine the company has identified additional opportunities to drive growth and improved profitability in 2023 and beyond.

As we've demonstrated with the respiratory announcement, we're not afraid to make tough decisions and we will continue to implement various actions over the next two quarters strengthened the long term health of the business.

These actions may include product line rationalization footprint optimization supply chain simplification organization, right sizing and liquidity enhancements.

Continuing to evolve and capitalize on the company's strengths and opportunities. We believe <unk> can return to an industry leadership position, we look forward to announcing further transformation actions as <unk>.

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

We will now take questions.

Yeah.

Thank you.

A reminder, for any questions. Please press star one on your telephone keypad.

Or if you change your mind and wish to withdraw your question. Please press star two.

Our first question is from Bob <unk> from CJS. Please go ahead.

Hi, Good morning, it's Pete Lucas for Bob.

As you look out to taken further actions how can we think about Europe and the rest of the world is that something that could be separated.

Asking because it seems like that alone is worth more than the enterprise value of the company.

As you look at that do you see buyers for that business out. There are there are people that would be valuable to just kind of how are you thinking about that.

Thanks for the question.

Obviously I think we've spoken previously the European business in the North America business are there are some.

Overlaps between the two businesses, but they are pretty separate from that perspective, obviously there are many different players in the European market in our space as well and so there could be the potential for interest in that particular business, but.

We're very happy with the European business Q3 was pretty much an anomaly from the revenue side of the house, but we see line of sight as we look into Q4 for stronger revenue stronger profitability. It's a very healthy business for the company and we continue to make improvements not only on the European side of the house, but for the company on a global basis.

Helpful. Thanks.

Then.

Jeff I guess, just with a fresh set of eyes in terms of the U S seating and mobility.

<unk> had a really tough time growing post consent decree.

It is actually seems like it has shrunk a little bit despite the new product cycle just wondering.

Why what you see the main issues being in kind of how you see those improving going forward.

Yes, Thanks Pete.

Look I think the mobility and seating channel is one way of reimbursement is pretty key.

In some ways.

<unk> struggled a little bit to meet those needs adequately with some of the supply chain challenges we've had but.

We do see good synergy this is one area, where our global portfolio is very helpful.

<unk> had that and.

And that's an area that we would look to.

To work towards that we have a more cost effective and more efficient.

Right.

That meets the needs of the reimbursement that also added Jesus.

See some opportunity for growth there.

And then I guess lastly, sticking with the supply chain you say it seems to be improving a bit in Q4 is that something that you feel with the liquidity that you have now can kind of finally put behind you. It just seems that.

You guys have been losing share across all product lines and just wondering if that's just mainly the supply chain or is it something competitors are doing differently.

I think thats a interesting question I guess.

If the expectation is all the ads.

If you think we're losing share than the competitors are doing something different.

But outside of the supply chain issues.

Consistent across all competitors some people are experiencing them in different ways, but.

We do say is commodity pricing in general not in every area that commodity pricing in general.

Looking like it will stay pretty much the assignment of <unk> 23 versus <unk> 22, we do say Frank.

<unk> down.

Should be a benefit to everyone.

Everyone.

Suddenly to us, but where with a broad portfolio across multiple countries and that comes with some complexity that some of that competitors got it has.

Sorry, that's something that we need to address in our portfolio as.

As we go forward.

And the supply chain in general.

<unk> seems to be coming down.

That <unk> seem to be about the size and of course, I don't have a crystal ball.

Other things might happen.

In the marketplace over the next.

Gyro side.

But I would agree Jeff I don't think the supply chain challenges are unique to the company.

And while we are seeing some commodity costs come down electronics still continue to be a challenge for the company.

For our competitors to be able to access those components to be able to complete units to customers.

I.

Got it very helpful. Thanks, I'll jump back into the queue.

Thank you.

Okay.

As a reminder for any further questions. Please press star one on your telephone keypad.

We have no further questions on the call. So I'll hand, the floor back to the team at <unk>.

Hi, Thanks Sebastian.

For your time this morning, Kathy Lois and I are available for any follow up questions, which you can coordinate through Lois Lee have a great day.

This concludes.

Today's conference call. Thank you all very much for joining you may now disconnect your lines.

Yeah.