IVC
#Thank you, Dana.
Joining me on today's call from Invacare are <UNK> <UNK>, Chairman, President and Chief Executive Officer; and Rob <UNK>, Senior Vice President and Chief Financial Officer.
Today, we will be reviewing our first quarter 2017 financial results and providing investors with an update on our transformation.
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 on www.invacare.com/investorrelations.
On our Investor Relations page, you will also find a PDF of the webcast slide presentation that we will refer to during today's call.
Before Matt begins, I'd like to note that during today's call, we will 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 first quarter earnings release and 10-Q.
For an explanation of the items considered to be non-GAAP financial information that will be discussed on today's call, such as free cash flow, constant currency net sales, adjusted earnings and loss, and EBITDA, please see the explanatory note in the Appendix of our webcast slides and in the related reconciliations in the earnings releases posted on our website.
Also, please note that the company completed the divestiture of Garden City Medical Inc.
in the third quarter of 2016.
GCM is included in the 2016 results that will be discussed on the call unless otherwise noted.
With that, I will now turn the call over to Matt <UNK>.
Thank you, <UNK>, and good morning.
As <UNK> mentioned, our company is undertaking a comprehensive transformation that is essential to reinvigorating our growth and profitability.
We're in the process of making substantive changes to our business that will affect results.
The highlights from the first quarter include reducing net sales of less accretive products and overall sales declines moderated from fourth quarter.
Our new core of North American mobility and seating products grew, Europe and Asia/Pacific had constant currency growth, consolidated gross margin as a percent of net sales increased as a result of our more clinical mix of products.
We launched several new clinical products and programs and through the first quarter, we made further progress in our quality systems, which resulted in completing important consent decree milestones in April.
Before we discuss the financial results for the quarter, I'd like to go through 2 slides quickly to align new investors and callers with what our company does and the reason for our transformation.
Looking at Slide 3 from our webcast presentation, you will see that our company makes products that help people move, breathe, rest and perform essential hygiene.
We focus on areas of congenital, acquired and degenerative conditions.
These are important parts of care for people with a range of challenges, from those who are active and heading to work or school each day and may need mobility or respiratory support, to those who are cared for in long-term care settings at home and in rehabilitation centers.
For decades, Invacare has been a leading global durable medical equipment company, serving customers worldwide by providing the broadest portfolio of products to our customers.
As a result of external challenges, like reimbursement reductions from payers to our U.S. customers, and internal challenges like the consent decree that affects some of our Elyria, Ohio campus, we concluded it was no longer feasible to follow this one-stop-shop strategy.
So starting in mid-2015, and continuing through 2016, we made substantial changes to our company strategy.
Since making this change, we have focused our resources on providing clinical solutions for complex rehabilitation, and post-acute care, and we have decreased the company's emphasis on products with less sustainable value.
This leverages the best of what Invacare has long done and eliminates the dilutive parts of the business bringing alignment of resources focused on patient-centric solutions to significant health care needs.
To get to that result, we divided our Transformation Program into 3 phases as you will see on Slide 4 beginning in 2015 and taking us through the next several years.
This is a basic crawl, walk, run kind of program.
In the second half of 2015, and throughout 2016, we did much of the heavy lifting of Phase 1 in North America.
We have retained and attracted new talent to our sales force.
We have a pipeline of great new products and programs, some of which I will discuss later.
And we recently achieved important milestones on our consent decree, which demonstrates our commitment to building a quality culture.
By the end of 2017, we expect to see results from our Phase 1 investments.
As we shift to Phase 2 in 2017 and 2018, our main focus is on continuing to build culture of quality excellence, growing sales and making cost improvements and efficiency gains.
Now for first quarter results.
On Slide 5, you'll see the results of the first quarter 2017 compared to the key financial indicators of Phase 1 and Phase 2 that we have referred to in our presentations.
As in much of the medical device industry, we're often rewarded for solving more clinically significant issues with better returns.
And it's difficult to have the same infrastructure to design and produce very simple products and very complex products at the same time.
So we have elected to reduce revenue in the short-term in order to reduce less strategic business and bring focus on growing the part of our business that provides more value in rehabilitation and post-acute care.
As a result in the first quarter, consolidated constant currency net sales decreased 4.4% excluding the Garden City Medical business that was sold in the third quarter last year.
Constant currency net sales increased for Europe and Asia/Pacific segments but were more than offset by declines in the North America/HME and the IPG segment where the transformation is most intensive.
As a result of the strategic shift to more clinically complex products, gross margin as a percent of net sales increased 180 basis points.
Gross margin is an important measure of what we're monitoring closely to ensure commercial and product effectiveness.
It was good to see this increase in the first quarter after the last 2 quarters of flattish gross margin with sales decline and increased warranty and R&D cost.
Gross profit decreased $2.7 million to $65.1 million with the Garden City Medical divestiture accounting for $2 million of that decline.
While it's still a decline, each segment's gross margin for the first quarter improved compared to prior year.
In North America/HME segment which has been significantly impacted by the transformation both gross profit dollars and gross margin as a percent of net sales, sequentially improved with fourth quarter '16 to first quarter '17.
Excluding foreign currency translation and the divested Garden City Medical business, SG&A increased $1.9 million or 2.7% in large part due to unfavorable foreign currency transaction.
During the first and second phases of transformation, we expect free cash flow to be negative as a result of investments we're making in the business.
In the first quarter, free cash flow was negative $33.4 million compared to negative $40.2 million in the first quarter last year.
The free cash flow drain was driven by the net loss and increased working capital which we typically see in the first half of the year.
Historically, the first half of the year has been seasonably our most cash consumptive period.
EBITDA in the first quarter was negative $7.1 million compared to negative $1.4 million in the first quarter 2016.
The decrease in EBITDA was impacted by lower net sales, increased restructuring cost related to previously announced actions in January and unfavorable foreign exchange.
While not noted on the slide, adjusted net loss per share was $0.47 compared to $0.26 for the first quarter of 2016.
The increase in adjusted net loss was driven by lower net sales, increased restructuring costs and unfavorable foreign exchange.
The company incurred net interest expense of $4.4 million in the first quarter 2017 compared to $2.3 million in the first quarter of 2016, primarily due to the company's 2016 convertible debt issuance.
We want to compare what we have done in the last year or so to what we said we would do.
So we continue to plot our recent quarter with the prior quarters since the transition started.
You will see this on Slide 6 of the presentation, this is our do-say ratio page.
On the page, you can see sequential and year-over-year trends.
Here we see the first quarter sales decreased as we discussed, but less than in the fourth quarter.
This is in line with our expectations of shallowing the decline in revenue.
For gross margin as a percent of net sales we're looking for improvement from mix shift, in the first quarter we once again see this metric improving.
This is good to see after a few weaker quarters related to choices we made to progress consent decree remediation to discontinue certain products.
Gross profit dollars as we've talked about over time are somewhat variable, that's the result of the titration and what we are decreasing and the new business we're building back.
With constant currency SG&A, you can see the reflection of the investments we've been making.
The free cash flow was negative, but improved compared to the first quarter last year.
As we've discussed, this is a significant renovation of our business and looking at these composite metrics over the past 6 quarters, we see how this transformation is not a straight line walk to the goal.
And not every quarter has mapped out perfectly to our expectations.
For example, gross margins shifts were delayed over the last 2 quarters of 2016 as we made investments in the remediation of new products.
We chose to do more portfolio trimming in the fourth quarter last year and the respiratory business hasn't come back after competitive bidding as much as we have expected.
But overall, we believe we are moving the business to the expected outcome of this multi-year transformation.
I will now turn the call over to <UNK> <UNK>, our CFO, to discuss the performance of the segments and additional financial results for the first quarter.
Thanks, Matt.
Turning to Slide 7.
All comparisons are with respect to same quarter last year unless otherwise noted.
For the first quarter 2017, Europe's constant currency net sales increased 3.2%.
The improvement in constant currency net sales was driven by mobility and seating products, partially offset by declines in respiratory and lifestyle products.
In the first quarter, operating income decreased by approximately $0.9 million, primarily related to unfavorable foreign exchange and increased SG&A expense, partially offset by increased sales, favorable sales mix and reduced warranty and freight costs.
Gross margin, as a percent of net sales increased slightly while gross profit dollars decreased by $0.2 million compared to the first quarter last year.
For the first quarter, North America/HME constant currency net sales excluding the divested Garden City Medical business decreased 14.7%.
The decrease in constant currency net sales was driven by lifestyle and respiratory products and to a lesser extent mobility and seating products.
As part of the company's focus on clinically complex products, we discontinued consumer power wheelchairs in the fourth quarter of 2016, excluding consumer power wheelchair net sales from the first quarter of 2016, constant currency net sales of mobility and seating products would have increased for the quarter compared to the same period last year.
Operating loss increased by $3.0 million, primarily related to net sales declines, partially offset by favorable sales mix and reduced warranty and freight expense.
The first 3 months in 2016 included $0.8 million of operating income for Garden City Medical.
Gross margin as a percent of net sales increased by 220 basis points and gross profit dollars decreased by $3.1 million compared to the first quarter last year.
Excluding Garden City Medical, gross profit dollars decreased by $1.0 million.
Constant currency net sales in the IPG segment decreased by 10.3%, across all major product categories.
Operating earnings increased $0.5 million, primarily related to reduced SG&A expense, and warranty and freight costs partially offset by net sales declines.
Gross margin as a percent of net sales increased by 270 basis points and gross profit dollars increased slightly compared to the same period last year.
For the first quarter 2017, Asia/Pacific constant currency net sales increased 15.9%.
The improvement in constant currency net sales was driven by the Australian and New Zealand distribution businesses as well as the company's subsidiary that produces microprocessor controllers.
For the first quarter, operating loss improved by $0.3 million, primarily related to increased sales, favorable sales mix, partially offset by increased R&D costs.
Gross margin as a percent of net sales increased by 60 basis points and gross profit dollars increased by $0.2 million compared to the same period last year.
Turning to Slide 8.
Total debt outstanding as of March 31, 2017 was $182.6 million.
The company's total debt outstanding consisted of a $150 million in convertible debt and $32.6 million in other debt, principally lease liabilities.
The company had 0 drawn on its revolving credit facilities with the availability of $42.0 million as of March 31, 2017.
The company's cash balances were $76.8 million as of March 31, 2017, compared to $124.2 million as of December 31, 2016.
The company's cash balances declined primarily due to free cash flow usage and the required repayment of the remaining $13.4 million in aggregate principal amount of convertible debt issued in 2007.
As of the end of the first quarter, day sales in receivables were 44 days up from 41 days at December 31, 2016, and down from 47 days as of March 31, 2016.
At the end of the first quarter, days of inventory were 71 days as compared to 65 days as of December 31, 2016, and March 31, 2016, respectively.
I will now turn the call back over to Matt for additional strategic comments, we then can address questions.
Thank you, Rob.
As we've noted previously, by the end of 2017, we expect a sustainable turn in both sales and operating income as a result of our transformation investments and activity.
In the first half of the year, we expect continued lower net sales offset by favorable sales mix and increased gross margin as a percent of net sales.
As you can see on Slide 9, we're already making progress on Phase 2 objectives, launching new clinical product platforms is an important component of our transformation and we have a full pipeline scheduled to launch in 2017 and beyond.
I would like to highlight a few of the new products that we've launched in the first quarter to demonstrate this.
In February, the North America/HME business launched the Swiss line of Kuschall active manual wheelchairs in the United States, which brings a whole new line of lightweight, high-performance wheelchair products to the U.S. active manual segment.
Kuschall has long has been an innovator mixing great performance, lightweight material and attractive designs.
This is an important launch re-energizing our custom manual wheelchair portfolio in U.S. market.
In March, our Alber electromotive subsidiary continued to launch market leading power add-on innovations with the recent Cruise Mode upgrade to Alber Twion devices.
This upgrade can be activated over the user's smartphone.
Now with one push, wheels will activate and maintain constant speed based on the user's input.
Cruise Mode is a great feature for active users who want to travel longer distances, get up hills or reduce the physical stress of moving.
And the Twion gives the ability to intuitively change direction and stop on command.
In March, we showcased these new rehabilitation products and many more at the International Seating Symposium in Nashville.
ISS is the largest complex rehabilitation trade show in North America.
We received great feedback from our clinical customers about our strong presence at the show for both new products and the integration of all of our rehabilitation businesses into one portfolio.
In addition to the momentum building within our rehabilitation team, we're making progress renovating our post-acute care commercial organization.
The post-acute team recently launched Outcomes By Design, which is a program created to help long-term care facilities improve clinical, financial and patient satisfaction outcomes.
This is another demonstration of our new growth go-to-market strategy.
we've integrated our solutions for safe patient handling, facility design and pressure management through this complicated selling program that will connect Invacare's newly trained post-acute sales force with the key leaders in our customers' organizations responsible for healthcare outcomes.
Beyond new products, we also recently achieved important milestones related to the consent decree at the corporate and Taylor Street facilities in Elyria, Ohio.
First, FDA has reinstated our ability to design new products at corporate and Taylor Street facilities.
This is called Certification-2 and we've been working to achieve this important milestone and move forward to a broader restoration of the business.
Passing Certification-2 was particularly important as it positions us to launch our latest power wheelchair platform, the TDX SP2 in North America from the Taylor Street facility later this year.
The TDX SP2, which has been available in Europe, will launch in North America with our new LiNX wirelessly programmable power wheelchair control system.
This product will be a great step forward for our power wheelchair portfolio.
Having acceptance of this report also allows us to move forward in the third certification of the consent decree process.
FDA accepted the third-party experts Certification-3 report, which was submitted in February 2016, as well as our own report, which was submitted last month.
The combination of both of these reports being submitted puts us in position for the necessary FDA inspection to begin later in May.
I cannot underscore how much time, energy and focus it has taken to get us to this critical point for the company.
It's been a long time coming, but since I arrived and with the help of our new leadership team and the hard work of many associates, we've made establishing a quality culture our #1 priority.
It's now a sustainable part of what we do.
While we're very pleased with our progress, it's important for listeners to know that we cannot predict the length or outcome of the inspection or any remaining work that may be needed to meet FDA's requirements for resuming full operations at the impacted facilities.
We are glad to be at this point and we look forward to demonstrating our progress to FDA.
As we move forward, we're continuing to focus on opportunities to reshape the business for cost and efficiency around our new sales level.
We also remain focused on the execution of our new commercial organization.
This is an area we evaluate daily.
We see progress as evidenced by first quarter growth in net sales of the new core of North America/HME mobility and seating products and by the behind of scenes activity in terms of customer engagement.
In the first half of 2017, we expect lower net sales, favorable sales mix and increased gross margin as a percent of net sales.
As we progress through the next phase of transformation, we will expand the scope of what we're doing to include a heavier emphasis on growing sales, reducing cost and improving efficiency.
Our priorities remain emphasizing a culture of quality excellence and achieving our long-term earnings potential.
Because of the scope and magnitude of the changes we're making, as well as the realized and potential changes affecting the business, we caution investors to expect some variation in the timing of these results.
However, we remain confident in the earnings potential of the business and our ability to get there.
We appreciate the continued support of our shareholders and associates through this process.
we're confident in our strategy to rebuild this business to be a sustainable leader in our markets.
I want to thank you for taking the time on the call this morning.
I think we have time for questions.
First off, congratulations on all the progress you have made with ---+ towards the consent decree over the last several months.
I know with FDA acceptance of Phase 3, you're not stopping your quality efforts.
But does it allow you to start shifting resources elsewhere at this point.
The decisions that we've made to focus on quality excellence and the path we've taken to get there, Matt, have really allowed us to do one big important thing for sure and that's be more effective in everything we do in the product portfolio.
We have chosen to move forward with fewer products and products that have more sustainable value, but because we are underpinning it with new processes and procedures that are not only fully compliant but efficient, we get to have a better more vibrant portfolio that's sustainable for roughly same percent of sales into R&D.
It's probably the biggest outcome.
It's like good record-keeping anywhere and good procedures you may have, the better that you do everything, the [lean] procedures and 5S that we're deploying through the factory just makes everything work better.
Matt, I will just add one thing.
The quality costs for North America have been coming down, so it won't be a whole lot of massive improvement on saving a lot more money there, but to build on Matt's point, I think the benefit is we have a lot of engineering talent focused on DHF remediation that's going to continue to focus on that.
It's very important that we have those things in the right position.
Well I think they are going to work a lot more on new products and helping us with the future.
Okay, that's great.
And can you give us some context around the increases in mobility and seating excluding the consumer power wheelchairs.
Are you seeing the benefit that you expected from the investments you've made in the sales force.
I think, yes, in the sales force and also, yes, in the integrating what the sales forces worldwide sell from our subsidiaries.
And that previously wasn't as well organized as it is today.
But today not only do we have a well-qualified sales force, but folks can walk into a clinical setting and look at a broad range of needs of an end user and work with our providers, to bring more novel important values and care not only in power wheelchairs but passive manual wheelchairs.
It all starts with seating and positioning to make sure that there is good posture management and trunk control and things like that in the end user and lots of interesting additions with Alber's power add-ons that help highly active people be even more active with novel products and lightweight design to attendant controls for a caretaker to be able to easily care for let's say large size passive patients.
Yes, both the combination of a good sales force that's coming up to speed and better integrated products across all our subsidiaries has really helped.
We're pleased with that.
And then we've got a portfolio to launch in 2017 that's bigger and bigger than the company has ever had in a year.
Maybe without quantifying what it's up, is it up a little bit mid-single-digit ---+ if you can give any kind of context on really what it's up excluding the discontinued chairs.
Yes, sure.
We don't break out the quantitative, so I appreciate you giving me a little wiggle room to answer that without being too specific.
It's up, and it's up at the beginning of what we think is going to be a long-term growth in that segment.
So I'd say it's kind of on the small end of being up, but it's clearly up in the places we want to focus.
And Matt, I'd just add one other thing.
When we're going through all that discontinuation, all those efforts, it takes a little bit of time to reset the customers, and reset everybody on the fact that there is a little bit different portfolio.
So I agree with Matt's qualitative indication of range and the answer is ultimately there were some other things the sales force had to focus on during that time period.
Okay, perfect.
Last question before I jump back in the queue.
Just some early takeaways from customer trials of the new portable oxygen concentrator if possible.
Sure.
Still really excited about that product, great output, great quality, great form factor, noise, weight, battery life, output, all those things, very robust design.
Looking back, I think we probably got it out a little later than we should have to take full advantage of the winter season.
But still great response from customers as we talked about before, but for everybody's benefit.
The process of getting it into big fleets takes a while because you get a small trial, it might last a quarter or more.
There is evaluation of feedback and then ultimately it feeds its way into future purchases.
So we look forward to continued growth of that product, it's really exciting.
It's a nice innovation of a platform or a portfolio, that's really broad, we bring value to respiratory customers for stationary needs and nondelivery forms and this is the first step of updating that portfolio that we'll continue to do.
Sure.
So IPG is the segment that really focuses on institutional products and much of that business is lumpy and long-term big projects either new constructions or renovations.
We of course support short-term needs, short-term like 24-hour arrival of a new patient resident who needs certain products that a facility doesn't have so we can easily rush those things out.
But the preponderance of the business is longer term in nature.
So the good news is, while we probably didn't have our eye on the ball on that business the way we should have before second quarter 2016, that inertia carried us that far.
But since second quarter 2016, we've really rebuilt that organization sales team, corporate account managers and as we announced last month, new services like Outcomes By Design that really align our products with the clinical needs that residential operators need to make sure that outcomes are great.
So the good news is that we got some vibrancy there, while we've had a legacy benefit of the inertia of that business, we also have the inertia of building it back.
We think it will take a couple more quarters, but we look at the backlog of business and customer engagement and who we're getting to meet with, it's really very positive.
But it's a capital cycle.
So you got to get in there and get funding and get taken forward.
Pleased with it, maybe to specifically answer your question, it's maybe fifth inning, little after half.
A couple of things, Chris.
So first, we didn't address it in the prepared remarks, so we're glad to answer it now.
As we said, in the prepared remarks, we are 71 days, compared to about 65 at year-end, 65 to a similar time March last year.
That increase from our vantage point was driven in large part by the fact that we have some organic sales decline.
So again, we had inventory for a little bit stronger buy in but then I'd also say from my vantage point, we have sort of a mix between products.
Though as Matt related to us a minute ago we saw mobility and seating, putting aside the consumer power show increase in North America, we had some weakness in lifestyles and respiratory.
So little weakness there.
I think the answer is what ---+ we'll work through this.
But we had to be somewhat cautious in sort of the first quarter and we've got to get some other activities in place to get to the point that we start to see those days come back down.
So we got work to do there.
We've discussed before even on the Q4 call.
The movement in inventory in 2016, which was pretty dramatic in terms of use of cash was not where we wanted to be.
In 2017, without specifically talking about quarters, our goal is clearly get in a better spot with inventory, that might be more in back half than front half.
But Chris, we're not trying to be in a position, 71 days is not where we're being cautious, that's just there's more activities to take, the North American team and Europe team are very focused on this going through the rest of the year.
We're all focused on [---+ these are] good point Rob (inaudible).
In Europe, we have lots of opportunities that we're focused on to increase the velocity of inventory that's important, it's around operational efficiency.
In North America, as we've continued to decline the lifestyles business, we've typically had trailing inventory balances because we want to have inventory to match what customers want.
Once we see how things settle out at new price points then we move through that inventory in subsequent periods so it's typically trailing, but we're definitely focused on working capital this year.
Bob, thank you.
Yes, we're looking to see this revenue line continue to flatten out through the year.
We talked about first half continuing to see sales declines.
There's still some areas in the lifestyles business that we need to prune.
It's not major compared to what we have done historically but that will continue to happen and then we want really to end 2017 with traction from this new commercial team that's set up well between their own skills and customer call points and the portfolio of new and existing products.
So this is really the turn year.
Yes, it depends by product as you would imagine.
So on the respiratory side, something like the new POC, it's one product in a big portfolio.
So it will take time to grow to a material size, where we can talk about it externally, or wave the flag, I think short lead on that product is great feature, great form factor, we're meeting the marketplace commercially where we need to.
So now it's a matter of just getting into people's fleets.
As I mentioned in my remarks earlier, I guess if everything had been perfect, we probably would have preferred to have this out a little earlier to get full advantage of the winter season.
So now we're going to see this, we expect to build through the summer season and then further uptick next winter as well.
So that's kind of a little bit longer cycle.
Then on the power wheelchair side and the wheelchair side, like with Kuschall which we've launched or the TDX SP2 with LiNX that we're going to launch.
As soon as those products are launched, they are in the hands of our sales team immediately that day or that point in time.
And then you're paced by extent that we're in clinical settings with new patients in need of assistive technology.
The quote cycle on those is 30 to 90 days depending on how big the request is and what the payer review process is and what the pre-approval cycle looks like, kind of pre-audit the CMS is working through.
So you kind of have 30 to 90 days on quote, we can typically move up from a quote to an order shipped and billed in less than 2 weeks, often less than one week.
And then you have that 60-ish day of receivables beyond that.
So we're really just paced by how quickly we can get into clinical settings to show those.
Outside ---+ that's kind of a North American answer.
Outside of North America, it's often based on tenders.
Or I should say outside the United States it's based on tenders.
So you may have a great product on a day, but if you just missed a 4-year tender, you might have to wait a while if you just get into a long-term tender then that's an immediate opportunity, which typically has some load-in sales so it's kind of a mix.
And those differences are blended into our sales along the way.
Yes, good question.
So the market is probably a little bit bigger based on population growth with the same incidence rate so we use that simplifying assumption.
And pricing is relatively the same, although competitors are really good in that marketplace and they've obviously taken the share that Invacare once had.
So it is a matter of going against very competitive customers ---+ I'm sorry, competitors, in these clinical settings and seeing patients.
Now, we have great features coming out in the TDX SP2.
I can't talk effusively enough about the benefits of this wireless programmability, which are great for end-users because they're going to end up with a better program to control, it's going to be easier in the clinical setting to get to that situation.
It's easier for the clinician, the whole experience is better.
And then for our providers, they have remote diagnostics and more predictive service calls, which lead to customer satisfaction and better productivity of their service teams.
It's better, better, better.
It fits into the same reimbursement scheme that's out there today.
So we're really looking forward to that.
So then the question is, once we get into the clinical settings when that product is launched in the third quarter, how quickly is the uptake based on that quote, order, ship, bill cycle.
And the good news too, Bob, is that we've been rebuilding our rehab sales force as part of this transformation over the past several years.
So we have specialists in the facilities, they are talking to our customers, we have a lot of other great products that we sell, in addition to the TDX product with a VMN.
So the relationships are being built and we're in a very good position compared to where we were a few years ago to be ready for getting out of the injunctive phase.
And strong provider interest.
Great partners for us worldwide.
So we've been showing features of the product since the ISS show in March and we continue to have good engagement with our providers on bringing that to market.
We're looking forward to it.
In 2015, the FDA was in the facility evaluating records for approximately 5 months.
So I don't know if that's exactly a benchmark for the next audit, it's a bigger scope, but the FDA is familiar with the scope through a third-party report, so it could be longer, could be shorter.
So it's difficult to predict.
Yes.
We typically talked about the quarterly cost of quality and this quarter they were $2.9 million.
So substantially down for around a $12 million run rate, which is down from ---+ I think last year it was in the 16-ish area.
And the consultants are essentially gone.
So those costs are specialized costs that are onetime in nature based on what costs were accounted for at the beginning of consent decree.
And as Rob mentioned in a prior comment, a lot of the work lately has been from our internal payroll folks, engineers for example, working on design history files so we'll get some productivity back from that team in terms of developing new product as we go forward.
But I think we've continued to demonstrate that specialized cost is coming down.
It won't go to 0 as we've talked about in the past, because obviously we didn't have the right base line to start this process or we wouldn't have a consent decree probably, so I'm not sure how much lower it will go.
But the benefits of even that sustained cost in the income statement should be reflected in other benefits like lower warranty costs, cost to serve, customer satisfaction, share growth, those kind of things.
And Jim the only thing I will add to that is when I think about that $2.9 million we spent in the quarter, the reason why that's come down so dramatically over time is I think the company has done a very good job of getting off of the external support from consultants, which to be blunt, they don't quite have the same ownership as you have internally and I think we've built up the team internally, that it's going to support complaints, capital, whatever key focus that we need to have.
So again, to Matt's point, there might be some room there.
But a lot of that now is headcount and associates who own it and live it as opposed to spending money externally.
Well, first of all, we need to give the dealers something that makes sense for them economically [and] driving share in their local markets to help patients.
And I think the good news is the portfolio we have has continued to be strong.
The products that we've eliminated have less clinical value for those providers and this new LiNX system is really unbelievable.
It's kind of like going from a flip phone to a smartphone, in terms of incremental features and benefits and the ability to grow that platform in the future, which helps both the end-users, so a provider can go into a clinical setting and show that they are a top-notch, high tech, avant\xe2\x80\x93garde provider that's really going to help the end-user and then themselves they've got better cost to serve through remote diagnostics and remote service views on those products.
So our strategy is to make sure that our providers know what the features are, they get familiar with those as the products come out, we've got to be market competitive on price that's important and we've got to have the right commercial coverage globally, which I think we do with the sales placements we have.
And along the way as we've talked about, we've got demos going out into the field, so everybody can see these products and try them out in a clinical setting.
And Jim, the only thing I will add and I think we said it all earlier, but I just reinforce it.
We've got a good strong sales force out there calling on them today.
They are out there selling the ROVI, they are out there selling the TDX SP today.
[It wouldn't be eminently,] but it's not as if we don't have other products including Alber products.
That we're out there pushing.
So I just want to make sure we don't leave the impression that we're somehow going to show up and figure out where the provider is located or try to explain to them who Invacare is or that we're just showing up again, the answer is we're dealing with them every day today.
I'm not saying it's going to be easy.
We're going to have to get in their system on quotes and orders, it's going to take time.
No one is going to hand us the market share.
But it's not like we've got a bunch on the sales people figuring out where the key providers are located.
Maybe ---+ I don't have that number exactly but maybe half.
Okay.
Thank you Dana, and thanks to everybody for your time and attention during today's call.
We continue to drive progress on this side [for renovation].
We are confident in potential of our segments, our pipeline of new products.
And we're continuing to make progress in the quality milestones.
While timing can vary somewhat along the way, we believe the company's earnings will potentially remain strong and we look forward to delivering on that.
Rob, <UNK> and I are available for any follow-up questions.
Have a good day.
Thank you.
