IVC
#Thank you, <UNK>, and good morning.
Since joining the Company in April, I've been travelling throughout North America and Europe to meet our associates, customers, and the people who use our products.
These experiences have validated my beliefs that Invacare has significant opportunities and like the industry's compelling fundamental drivers, positive demographic trends in the markets we serve, and the proven clinical and financial benefits of home care.
As CEO, I've spent the last few months focusing the organization on two critical priorities.
Our first priority is building a strong, sustainable, quality culture throughout the Company.
The second priority is generating profitable growth.
There are a number of transition activities underway to make that happen, primarily in the North America HME segment, where we are aligning the team to execute.
We've also positioned ourselves for the future by adjusting our capital structure and narrowing our focus on our long-term strength as evidenced through the real estate sale and leaseback transaction completed in April and the recent divestiture of the United States rentals businesses.
Before I talk more about our short-term focus and strategy, I'd like to review our second quarter 2015 financial results.
First, let's review the segments.
Our European business, which comprises our full portfolio including mobility and seating, lifestyle, and respiratory products, had constant-currency net sales growth of 2.9%.
With the ongoing pressure from foreign exchange, net sales declined 16.7% compared to the second quarter last year.
The Asia/Pacific business grew constant-currency net sales by 6.7% with growth in both the New Zealand and Australian distribution businesses.
Foreign exchange rates reduced net sales by 16% to negative 9.3% on a reported basis compared to the second quarter last year.
Now I'll cover the two North American segments where we are focusing most of our transitional activity.
In the second quarter the institutional products group completed the supply chain shift of its long-term-care bed facility.
Driven by increases in bed sales as well as interior design projects, the segment achieved 6.9% constant-currency net sales growth and 6.1% reported net sales growth compared to the second quarter last year.
The North America HME business, which is being realigned to achieve its full potential, experienced a net sales decline of 10.5% on a constant-currency basis and a decline of 11.4% on a reported basis compared to the second quarter last year.
To offset the sales decline during the quarter, the team continued to manage expenses and still reduced its adjusted net loss by $6.2 million compared to the second quarter last year.
For the Company's consolidated results, constant-currency net sales decreased 2.1% for the second quarter compared to the same period last year and decreased by 12.4% on a reported net sales basis compared to last year.
Overall, adjusted net loss per share improved to $0.23 from $0.39 last year.
The reduction in loss was driven by the decrease in SG&A expense of 17.7% to $82.5 million compared to $100.3 million last year.
Foreign currency translation reduced net SG&A expense by $7.3 million or 7.2 percentage points.
Constant-currency SG&A expense decreased 10.5% compared to the second quarter last year.
Gross margin as a percentage of net sales was lower by 1 percentage point compared to the second quarter last year.
This was driven by unfavorable foreign exchange, freight cost, and negative sales mix.
Manufacturing costs were favorable.
I'll now turn the call over to <UNK> <UNK> to discuss earnings performance for the segments and additional financial results for the second quarter.
Thanks, <UNK>.
All the references to earnings or losses before income taxes exclude restructuring costs.
For the second quarter of 2015, earnings before income taxes in the European segment decreased $6.1 million compared to last year, primarily due to unfavorable foreign exchange and reduced gross margin, which was driven, in part, by negative sales mix.
For the North America HME segment, loss before income taxes improved by $6.2 million compared to the second quarter last year.
The reduction in loss for the quarter was driven by favorable SG&A expense from lower employment costs and by an improved gross margin as a result of favorable manufacturing and warranty costs.
For the institutional products group, earnings before income taxes improved by $1.8 million, largely due to favorable SG&A expense primarily related to lower employments costs and depreciation and amortization expenses.
For the second quarter of 2015, Asia/Pacific loss before income taxes decreased by $1.4 million.
The reduction in loss before income taxes was largely due to favorable SG&A expense, driven by lower employment costs and a favorable gross margin driven by lower warranty and freight costs.
In the second quarter, free cash flow was positive $9.5 million compared to negative $8.6 million in the second quarter last year.
The second quarter free cash flow was favorably impacted by $23 million received as a result of the real estate sale and leaseback transaction announced on April 22, 2015.
Excluding the cash proceeds from the sale-leaseback transaction, free cash flow was negative $13.5 million.
Free cash flow was unfavorably impacted by increased inventory levels and a $1.9 million payment related to the 2014 retirement of an executive officer of the Company.
Total debt outstanding, which includes the convertible debt discount as described in the release, was $49.5 million as of June 30, 2015.
The Company's total debt outstanding consisted of zero drawn on the revolving credit facility, $13.4 million in convertible debt, and $36.1 million of other debt, principally lease liabilities which increased by approximately $32.3 million as the result of the sale-leaseback transaction.
During the second quarter, borrowings on the revolving credit facility ranged from a high of $32.9 million to a low of zero, with an ending balance of zero.
The Company's available borrowing capacity was $46.9 million as of June 30, 2015.
As of the end of the second quarter, days sales outstanding were 49 days, up from 45 days as of December 31, 2014 and equal to 49 days as of June 30, 2014.
At the end of the second quarter, inventory turns were 4.7, down from 4.9 as of December 31, 2014 and down from 4.9 as of June 30, 2014.
I'll now turn the call over to <UNK> for some closing comments and then we can address questions.
Thank you, <UNK>.
Since April, we've implemented multiple initiatives to advance the Company's two priorities; establishing an enhanced quality culture and generating profitable growth.
On the first priority, we are making progress towards establishing a sustainable, enhanced quality culture throughout the organization.
I'm very pleased with the work and progress of the cross-functional teams on our quality implementation plans.
While we are not talking about timing of the third-party certification audit, I want to assure you that establishing a strong corporate quality culture that will enable us to exit the injunctive phase of the consent decree is the number-one priority of the organization.
To achieve our second priority of generating profitable growth, we are realigning the focus of the team, particularly in the North America HME segment.
As part of this, I've recently appointed Dean Childers as the Senior Vice President and General Manager of the North America HME and IPG segments.
I've worked with Dean for over 10 years in both private equity and medical device organizations.
He has a proven ability to assess a company's strengths and opportunities and link customer needs with innovative solutions.
I'm glad to have him as part of our team.
During my travels, I've met many customers as well as people who use our products, who compliment the innovations and technology behind Invacare's medical devices.
We truly do make a difference in people's lives in a market that's growing.
This reinforces the opportunity ahead of us and we are committed to achieving the Company's full potential.
I am pleased to be moving forward on this journey of recovery and growth.
I want to thank everyone for their time and attention on today's call.
We'll now open the phone lines for questions.
Good morning, <UNK>.
I wouldn't say transitional issues as a full-stop sentence.
Obviously, the Company is not in the place it needs to be for financial performance so we have a number of transitional items underway.
We're looking at all parts of the organization.
You could go down the financial statement and look at how we generate revenue and how we incur costs in our manufacturing facility and what we're doing in engineering and so on.
It's a full assessment of how we're re-orienting ourselves to generate more profitable growth and establish a quality culture throughout the Company as quickly as possible.
I think there were a number of issues in the transition related to salesforce focus, re-orienting our priorities, the kind of assessment the teams have to do to determine what they were planning on doing and then realign with what we're now planning on doing going forward.
I would also talk about the lifestyles single-user product line transition, which continued through second quarter.
That was somewhat hampered by a longer duration deployment of inventory because of the West Coast port strike, which didn't allow all that inventory to come in.
There were a number of minor issues like that that accumulated to that decline.
I think part of the increased inventory levels were new forecasting for the single-user lifestyle products and then a fair amount of inventory that was stuck in transit through the transition of those products to North America including that West Coast port strike.
<UNK>, we're completely focused on building this quality culture and there are a lot of things underway.
And I'm not going to talk about the presence or absence of auditors or other artifacts along the way because I think they just don't have any positive predictive value on the timing or likelihood of an exit at any point in time.
So, I appreciate everyone's curiosity.
I can absolutely assure you it is the number-one thing we're focused on, but we're really not going to talk about those details until there's something that has that positive predictive value we're looking for.
Good morning, <UNK>.
<UNK>, it's <UNK>.
I'll cover that.
Just to put it in context, the earnings before tax were $12.3 million last year second quarter and were down about $6.1 million.
So, the biggest driver, and I'd say easily 80%-plus, is a combination of FX translation and FX transaction.
So, the big issue for the quarter was ---+ and we'll just use one currency though we have many in Europe ---+ the euro last year averaged about $1.38 and this year second quarter it averaged about $1.09.
So that's about a 21% hit.
So translation hurt us and then, additionally, transaction hit us, too.
So, again, big driver for the quarter would have been, by far, FX.
We did mention the sales mix.
Similar to first quarter, we did have a combination of mix on product and mix on customers that didn't quite go our way.
For instance, some of the bigger buying groups were stronger in certain countries.
And, additionally, if you looked at product, we might, for instance, the example we gave first quarter was that the power wheelchairs we were selling were the lower-margin power wheelchairs than the higher margin.
Just, again, a mix of requests from customers.
So, not a major issue on the mix, though, obviously, important enough to mention.
The big issue for the quarter was FX.
Did that help, <UNK>.
Sure.
Sure.
Invacare is comprised of over 50 acquisitions that have occurred over the Company's history.
And I think the company culture has been very strong in terms of fostering innovation and entrepreneurialism on those small, relatively regional or local levels, based on all those little businesses that have great clinical solutions.
My idea of a great company going forward is to have solid global platforms where those efficiencies make sense, but still be a company that's perceived as an agile, locally-competitive company in its markets.
Because we do compete against smaller players in a number of markets that do have the potential to be agile.
We can too.
In between having great, strong global platforms and still acting locally, there have to be synergies to come out of the Company as we work more quickly, we have better products, and we're relevant in all those markets.
I don't know whether it's the number you had mentioned.
I haven't done the reconciliation back to that number.
I think that comes after a structural look, which comes after a strategic look at how we move forward in the first, second, and third years going forward.
In the short term, the quality culture enhancements are our number-one focus and we're putting together plans to understand how we can do the layering of global excellence and regional excellence and, from that, we'll get to what those cost reductions or profitability changes are.
I'm sure they're out there.
Sure.
Thanks, <UNK>.
Yes, <UNK>.
Good morning.
I'll give you my version of that.
And, <UNK>, any other comments.
I think ---+ I look at the business in the segments first, as I had mentioned this morning.
I think Europe, where we have the full portfolio of products, looks like Invacare in total.
I think North America, where we have ongoing focus for quality enhancements, we obviously have the impairment of the injunctive phase of the consent decree, we have more transition going on and you can imagine that when you change some things other things change consequentially and I think the second quarter results in the North America HME segment reflect the consumption of some of our attention as we migrate from all the things we used to do to a fewer number of focused things in the future.
So, it's not surprising.
But, to be good managers we've got to continue to deliver bottom line improvements, which is why we've continued to focus on overall cost containment and tried to hold or improve, and we did improve the overall bottom line in terms of earnings from that segment.
<UNK>.
Sure.
The charge overall is sales effectivity, which is everything from opportunity alignment to training and knowledge base to brushing up on consultative sales skills to making sure that our sales team is very in-tune with clinical outcomes that we can provide with our great solutions.
So, I think all of those are all kind of a brushing up on sales acumen.
And then, overall, we want to make sure that we're aligning our consultative skills-based sales organization towards the appropriate mix of clinical-complex solutions and looking for efficiencies to drive everywhere else in the organization in terms of how we provide products and solutions to market.
And that takes time.
It's not surprising that it happened and some impact on the quarter.
And we expect improvements in the future.
I think, yes, there wasn't ---+ we didn't buy a lot of plane tickets to bring people back to headquarters, but there was certainly a measurable amount of time in opportunity assessment, the kind of CRM programming that you do, customer relationship management programming that you do, an assessment of the effectiveness of sales hours towards sales opportunities, and making sure we're always able to provide the best clinical outcomes proportional to what our products and solutions can do.
And that absolutely consumed time.
Not any differently than it would on a normal basis, not holistically, no.
Just back to your original question about the one-times.
There weren't any particular one-time benefits or impacts in the second quarter.
It was a relatively clean quarter.
But, then again, I just, for the benefits of the shareholders or people listening on the call, the adjusted earnings per share loss in the second quarter was $0.23 and for the year to date is $0.44.
So, we're right ---+ very close to where we were on the first quarter.
And given the performance on the sales line for North America HME, I would say that that's a good performance from that vantage point.
Again, I think we managed what we could manage in the quarter.
Yes.
You know, when we have something that I think has positive predictive value that really indicates where we are and the outcome with respect to the injunctive phase of the consent decree, we will absolutely do that.
My focus and what we can control is building this quality culture.
I obviously can't speak on behalf of the FDA.
It's our objective to give them an opportunity to audit us and have good evidence of how we are embracing what we need to do, but timing of that is TBD.
We'll be back with shareholders and public announcements when there's something that has real predictive value.
Well, you know there's a timeframe there so the moment we complete the audit there may not be anything.
At some point, when that's completed there are reports.
There's exchange of information with the FDA, for example, and then, ultimately, a resolution.
So where within that timeline we'll have a specific indication of outcome, I don't know.
Yes, the latter, I think.
You know, as part of the privilege of selling a medical device, the FDA can come at any time and the FDA's presence or absence in a company, ours or anyone's, is not particularly indicative at any point in time.
So, we may not say anything until it's all over and we have an affirmation or some other change in our circumstance.
Yes.
Thanks, <UNK>.
Well, once again, I want to thank everybody's support and attention this morning.
We look really forward to growing this business and continuing to dialogue with you on changes in the Company.
Thanks again for your help and I hope you have a good day.
