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Edited Transcript of IVC earnings conference call or presentation 10-Feb-20 1:30pm GMT

Q4 2019 Invacare Corp Earnings Call

ELYRIA Feb 15, 2020 (Thomson StreetEvents) -- Edited Transcript of Invacare Corp earnings conference call or presentation Monday, February 10, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kathleen P. Leneghan

Invacare Corporation - Senior VP & CFO

* Lois Lee

Invacare Corporation - Director of Treasury and IR

* Matthew E. Monaghan

Invacare Corporation - Chairman, President & CEO

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Conference Call Participants

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* Christopher Cook Cooley

Stephens Inc., Research Division - MD

* Matthew Ian Mishan

KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst

* Michael Stephen Matson

Needham & Company, LLC, Research Division - Senior Analyst

* Robert James Labick

CJS Securities, Inc. - President & Director of Research

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Invacare Fourth Quarter and Full Year 2019 Conference Call and webcast. After the management overview, we will open the call to questions. (Operator Instructions)

This conference is being recorded Monday, February 10, 2020. And now I would like to turn the call over to Lois Lee, Invacare's Director of Treasury and Investor Relations. Please go ahead.

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Lois Lee, Invacare Corporation - Director of Treasury and IR [2]

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Thank you, Jack. Joining me on today's call from Invacare are Matt Monaghan, Chairman, President and Chief Executive Officer; and Kathy Leneghan, Senior Vice President and Chief Financial Officer.

Today, we will be reviewing our fourth quarter and full year 2019 financial results and providing investors with an update on our transformation. Health 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 that we will refer to during today's presentation at invacare.com/investorrelations. 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 statement included on the second page of our webcast slides and in our fourth quarter earnings release.

For an explanation of items considered to be non-GAAP financial information that will be discussed on today's call, such as constant currency net sales, constant currency SG&A, free cash flow, adjusted EBITDA and adjusted net loss, please see the notes in the appendix of our webcast slides and in the related reconciliations in the earnings release posted on our website.

I will now turn the call over to Matt Monaghan.

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Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [3]

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Thanks, Lois. Good morning to everyone on today's call. I'm pleased to say we ended 2019 on a stronger, continuing to build, momentum from earlier in the year, improved the business and achieved our annual financial guidance.

Forecasting and to get into our results, I want to take time to reflect on our progress in 2019 and on the path ahead in 2020. Turning to Slide 4. In 2019, it was critical for us to improve operating results and cash flow and to take another significant step towards our long-term targets. I'm pleased to announce we achieved our guidance of generating at least $20 million of adjusted EBITDA and consuming not more than $25 million of cash. For full year 2019, our total operating loss improved by 43% and total adjusted EBITDA of $28.7 million was an improvement of more than $22 million compared to 2018, driven by actions which streamlined business operations, reduced SG&A and expanded gross profit.

Importantly, our North America business strengthened with a 77% improvement in operating performance. Free cash flow usage benefited from stronger operating results and reduced working capital, primarily lower inventory levels, which led to a nearly $45 million improvement compared to 2018 with a net result of continuing $8.1 million of cash compared to having consumed nearly $53 million of cash the prior year.

While encouraged by our continued progress, we didn't achieve everything we had set out to do in 2019, as net sales growth fell short of our expectations. To reach our full potential, we know we need profitable net sales growth in 2020 and have many actions already underway to help us do that.

Turning to Slide 5. Our strong 2019 full year performance was driven by key initiatives focused on product innovation and sales mix, process improvements and expanding balance sheet flexibility. Starting with product innovation and sales mix. We made significant adjustments to our portfolio by discontinuing certain legacy manual wheelchairs and lifestyle products, focusing on more valuable products within our respiratory portfolio, and introducing new products in all categories, offering greater customer and clinical benefits. The results of these actions was a decline of less than 1% constant currency net sales, overwhelmingly as a result of the weakness in the respiratory market early in 2019 and due to intentional decisions in the second half of the year. This decline more than offset $10 million of growth in mobility and seating. Even despite the significant respiratory sales decline for the year, financial results for the respiratory product line increased due to favorable mix, optimized cost and improved industry-leading product liability. In total, the company's gross profit improved by 70 basis points.

For the last several years, we've been focusing on building back our mobility and seating business. In 2019, our global mobility and seating portfolio at constant currency net sales growth of $10 million or 2.5% after changes in the manual and power portfolio worldwide. In Europe, mobility and seating constant currency net sales grew 4.4% as a result of strong sales of the SMOOV power add-on.

In North America, mobility and seating growth in power mobility products was overshadowed by the year 1 impact of discontinued older manual wheelchair model. Importantly, despite lower sales in North America in total, the region's gross profit improved by 200 basis points from the prior year. Our product development teams continue to strengthen our portfolio. In 2019, we launched new products in every product category, in power and manual wheelchairs, in respiratory, lifts, beds and mattresses, all of which will help us drive incremental sales in 2020 and beyond as adoption grows.

In fourth quarter 2019, we debuted a very competitive center-wheel drive power wheelchair with standing capabilities, built with outstanding kinematics and specifically designed for group 3 reimbursements in the United States, so more people can be funded for this basic need. Already in the short time, our new standing system has been in the market, it has been well received by customers and end users.

In addition, we launched the SMOOV power add-on in Europe, which adds amazingly small, agile and intuitive lithium battery-powered propulsion to manual wheelchairs. In various regions, we added products to our lifestyle segment, including a new bed system, a new lift in swings and a new line of pneumatic mattresses for care of patients with fragile tissue condition. Sales of these new products will stand globally in 2020.

Finally, in respiratory, we introduced the world's first portable oxygen concentrator with remote control, meeting FDA's new wireless technology requirements and giving clients the world's only truly hands-free, battery-powered portable oxygen concentrator, so people can continue living as actively and independently as possible. We expect these innovative new products will grow our business by providing greater clinical value to end users and even better financial options for our customers. The underwriting innovation will mean substantial business improvements in 2019. And we streamlined our business to reduce costs, increase competitiveness and improve profitability. And particularly, we've reduced constant currency SG&A by nearly $15 million, substantially mitigated the potential $7 million impact of tariffs and completed 2 plant consolidations in Europe that have been announced in 2018.

And in December, we announced the beginning of an additional large plant transfer in Europe that will consolidate our 2 main German operations into a single German facility by the end of 2020. Additionally, at the beginning of the fourth quarter, we engaged in a strategic long-term program to modernize our IT infrastructure. This is essential to our continued business improvements for the benefit of customers, suppliers and shareholders. As previously discussed, this novel arrangement will enable us to execute a complete renovation to our IT infrastructure at no incremental in-period expense compared to our typical spending. Once completed, we will have a robust customer self-service platform, which will simplify how customers transact with us and will improve customer experience with all the modern conveniences of typical e-commerce sites. System will also provide state-of-the art manufacturing and inventory functions and a simplified reporting system. This new system will enable further streamlining of the business and ultimately, better financial performance.

We have a track record of managing through adversity and delivering meaningful improvement. In 2020, we will continue to look for additional ways to optimize the business. Finally, in 2019, we also improved our capital structure and strengthened our balance sheet. In the third quarter of 2019, we reduced the total amount of debt outstanding by repurchasing $16 million of convertible notes at a discount to par and in fourth quarter 2019, we extended the majority of the balance of the 2021 convertible notes to a new maturity date of November 2024 at the same interest rate. These actions will enhance our financial flexibility as we continue our business transformation.

Overall, I'm proud of our accomplishments in the past several years and definitely of those in 2019. In 2020, we will build further on these initiatives to realize our long-term goals.

Turning to Slide 6. The strong foundation we laid in 2019 allows us to focus on execution in 2020. In 2019, we launched many new innovative products, but we admittedly weren't as affected commercializing them as we had expected. In 2020, we have actions in place to rectify this and to accelerate sales growth by investing in sales and marketing talent, making our product launch programs more consistent, increasing the number of demo units, driving customer awareness and reallocating spending to all of this while still lowering overall SG&A expense.

In mobility and seating, we will launch our new line of front-wheel drive and rear-wheel drive power wheelchairs during the first half of 2020, supplementing the power wheelchair with standing capabilities launched in the fourth quarter of 2019. Based on the timing of these new product launches and the long quote-to-order cycle, we expect the financial benefits of these new products later in the year.

Sales in first quarter of 2020 are expected to be flat compared to the first quarter of 2019, and sales should accelerate throughout the year, in line with the typical seasonality of our business. Looking ahead, we continue to expect interest in our entire respiratory portfolio. In the second half of 2020, we will begin launching a refreshed portfolio of stationary oxygen concentrators with improved performance, novel features and a new level of low total ownership costs for providers. Universally, we're seeing respiratory customers making value-based choices that reflect an appreciation of total cost of ownership, which is good for Invacare branded products. We remain committed to serving the respiratory markets and are confident the business as a breakeven.

During to process improvements, we will begin to realize the full year's benefit of the plant consolidations in France and the cost-saving actions that occurred in 2019. In 2020, we're focused on the consolidation of 2 German manufacturing facilities, which is expected to generate annual pre-cost -- pretax cost savings of approximately $5 million when completed in the fourth quarter. In addition, we plan to reduce global freight costs by partnering with third-party logistics providers, which will improve customer service and further expand gross profit.

Finally, the successful modernization of our IT infrastructure will improve customer engagement, increased visibility of global sales trends and inventory levels, and streamlined operations, all of which will strengthen our financial performance. We expect minimal disruption as we go live in North America in 2020 and go live in Europe in 2021.

In summary, we have all the necessary building blocks in place for a successful 2020, and I'm confident in our ability to deliver sustained and improved performance. I'll now turn the call over to Kathy Leneghan to discuss the performance of the segments and additional financial results for fourth quarter and full year.

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Kathleen P. Leneghan, Invacare Corporation - Senior VP & CFO [4]

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Thanks, Matt. Turning to Slide 8. During the fourth quarter, constant currency net sales decreased 2.1%, primarily driven by a decline in respiratory products. Gross profit improved 130 basis points, with growth across all segments, primarily as a result of favorable sales mix and lower material costs, partially offset by unfavorable manufacturing variance and foreign exchange.

Constant currency SG&A improved by 4.1% or $2.7 million, driven primarily by previously announced restructuring actions, partially offset by an increase in stock compensations and bonus expense. Operating loss was $3.8 million compared to a loss of $1.1 million in the fourth quarter 2018 and a reduction of $3.9 million in SG&A expenses was more than offset by an increase of $6.4 million of restructuring costs, primarily related to the German plant consolidation and IT outsourcing.

Free cash flow improved by more than 200% to $3.8 million and adjusted EBITDA was $13.9 million, an improvement of $7.9 million driven by lower SG&A expenses.

Turning to Slide 9. For the full year, mobility and seating and constant currency net sales growth of $10 million was more than offset by an over $19 million decrease in sales of respiratory products. Excluding respiratory, constant currency net sales increased 1.2%. Gross profit improved 70 basis points, which reflects the effective mitigation of approximately $5 million of tariffs, leaving less than $2 million of remaining exposure. Constant currency SG&A improved by nearly $15 million due to restructuring actions taken throughout the year. Free cash flow improved by nearly $45 million or approximately 85%, driven by stronger operating results and reduced working capital. Adjusted EBITDA was $28.7 million, an improvement of over $22 million, demonstrating that our transformation remains on track.

Turning to Slide 10. Europe constant currency net sales decreased slightly due to minor decreases in all product categories. While we believe the markets in Europe are healthy, we experienced slowness in Denmark in equipment sales, given the government's focus on refurbishment of products versus investing in new products. In addition, lower sales of lifestyle products in Sweden were the result of a delay in the timing of a tender being awarded. However, operating income increased by $4.4 million or almost 49%, principally due to improved gross profit from favorable materials, freight and manufacturing variances as well as reduced SG&A expenses. These were partially offset by lower net sales and unfavorable foreign exchange of $900,000.

For the full year, constant currency net sales increased 1.2%. The growth was driven by a 4.4% increase in sales of mobility and seating products, primarily due to the successful launch of the electromotive power add-on product. Operating income increased $3.5 million despite the unfavorable impact from foreign exchange of $3.2 million.

Turning to Slide 11. North America constant currency net sales decreased 2.5%. We achieved growth in mobility and seating products of 2.8%, driven by increased sales of powered mobility products, but this was more than offset by decreases in other products, including a more than 20% decline in respiratory. Excluding respiratory, constant currency net sales increased 0.8%. Gross profit improved 140 basis points and was positively impacted by favorable material and freight costs as well as improved sales mix, partially offset by unfavorable manufacturing variances. Operating loss improved by over 96% or $7.2 million, primarily due to higher gross profit and reduced SG&A expense.

For the full year, constant currency net sales growth in mobility and seating and lifestyle was completely offset by decreases in respiratory. Excluding respiratory, constant currency net sales increased 0.1%. Gross profit improved 200 basis points and was positively impacted by favorable material, freight and sales mix, partially offset by unfavorable sales volumes and manufacturing variances. Operating results improved significantly by nearly $25 million or almost 77% as we realized the benefit of transformation initiatives, which expanded gross profit and reduced SG&A expenses.

Turning to Slide 12. Asia Pacific constant currency net sales decreased 14.5%, driven by lower sales of mobility and seating products, due to payer process changes which temporarily affected fundings in New Zealand. Operating loss for all other increased $8 million, primarily driven by increased SG&A expense related to stock compensation and bonuses as well as a decline in the operating profit for the Asia Pacific business, driven by lower net sales and increased SG&A costs.

For the whole year, constant currency net sales increased 0.4%. Operating loss increased $12.2 million, principally due to the same factors that impacted the fourth quarter.

Moving to Slide 13. The company generated free cash flow of $3.8 million in the fourth quarter 2019, an improvement of $2.7 million, driven by stronger operating results, partially offset by higher investments in capital expenditures. As of December 31, 2019, the company had $254 million in convertible debt outstanding and $80 million of cash on its balance sheet. The revolving credit facility has remained undrawn for the last 4 years. The company believes that continued generation of adjusted EBITDA, driven by operational performance, cash balances on hand and expected free cash flow will support the company's ongoing transformation plans and enable us to address future debt maturities.

Turning to Slide 15. For the full year 2020, we expect operating results consisting of constant currency net sales growth of 2% to 4% for the full year, adjusted EBITDA of at least $45 million and free cash flow generation of at least $5 million. The company expects constant currency net sales growth in 2020 in combination with what is expected to be a typical year of seasonal sales variance by quarter. As a result, sales are expected to be flat in the first quarter 2020 over the prior year, with growth coming in later quarters, amplified by new product introductions expected to be impactful in the second half of the year. Adjusted EBITDA is expected to benefit from further process improvements and cost reductions to occur through the year, mostly in the second half after precedent work is completed. Stock compensation expense is expected to be similar to 2019.

And finally, free cash flow guidance assumes significant improvement in segment operating performance compared to 2019, partially offset by increased working capital to support growth, especially in the North America mobility and seating products with an extended quote-to-cash cycle. We also anticipate higher capital expenditures and cash usage to fund restructuring actions especially in the second half related to cost savings. Free cash flow in the first quarter 2020 is expected to be similar to the first quarter 2019 and includes ERP-related investments. These operating results are in line with previous guidance from run rate adjusted EBITDA in the range of $85 million to $105 million by the fourth quarter 2020. The $85 million to $105 million run rate is not intended to reflect our full year 2021 guidance, which we will provide during our fourth quarter 2020 earnings release.

I will now turn the call back over to Matt.

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Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [5]

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Thanks, Kathy. We made substantial durable improvements to our business in 2019 that resulted in significantly improved performance. We will continue to execute our plans to return the company to profitability and increase shareholder value. The entire Invacare team of associates, and I, appreciate the continued support of our shareholders, and I want to thank all of our Invacare associates who've worked so hard to make Invacare strong. Thank you for taking time this morning. We'll now take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will begin with Bob Labick with CJS Securities.

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Robert James Labick, CJS Securities, Inc. - President & Director of Research [2]

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Congratulations on a great quarter. Great job, great execution. So I wanted to start with the Birlasoft and the IT outsourcing and ERP implementation. Obviously, still a lot ahead, and you're on track there. Can you just remind us of the road map for the next 6 to 12 months? And where we stand on both of those things, the IT outsourcing and the ERP?

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Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [3]

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Yes, those kind of go hand-in-hand, we really are in the process of turning over all of our IT infrastructure to Birlasoft so that they provide back to us some service for the legacy systems and then at the same time, migrate from those legacy systems to new ERP systems. And it's not just the ERP, it's lots of other softwares, as you and others probably can get through our dozens and dozens of elements of software that make a big enterprise work. The objective for our migration this year is to complete the transfer of existing IT services to Birlasoft and at the same time to go live with an ERP system in North America by the middle of this year, so that after the normal amount of hyper care and transition and getting to steady state, we end up simplifying our business, being easier to transact, and more profitable as a result of that before the end of this year in North America.

The template that we're using to define our processes is a global template. Team members from around the world are working on that now. That template, once it's done in North America, will be deployed in Europe at the beginning of next year and we have a huge subsidiaries around the world that will catch up at various points when it makes sense. But the majority of North America will be now, and Europe will be at the beginning of next year.

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Robert James Labick, CJS Securities, Inc. - President & Director of Research [4]

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Got it. Great. And then jumping over to new products. You -- I'm sorry? Just going to -- going to new products, you talked about some new wheelchairs coming out this year. Could you talk a little more about, A, what differentiates them feature-wise? And then also, as importantly, from a reimbursement perspective, you highlighted group 3 reimbursement. Just expand on that, if you can?

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Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [5]

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Sure. So wheelchairs typically come in 3 drive varieties, similar with cars, I guess. Front-wheel drive, rear-wheel drive, center-wheel drive. There are reasons that those different modalities are of relative importance depending on a person's lifestyle and what they're doing. It's usually a combination of how much outdoor or indoor driving that they're trying to do, how big the space is they're operating in for living or working or socializing, and how much hard or soft ground that they're trying to go on as a part of their normal day and there are different trade-offs. Probably, and I'm going to estimate roughly 30% of the market worldwide is front-wheel and rear-wheel drive, and those are markets where we either haven't had a modern product or a product at all since the consent decree having not refurbished our front-wheel drive products as recently as 2014, I think. So getting these products back out and refreshed is really important for Invacare, addressing a big segment of the market where we didn't have the best products until now.

But now we believe the products we are bringing to market in those categories are at the top of the line in terms of performance and capabilities, modern aesthetics, and the kinematics that help the occupant move very smoothly and seamlessly. In the -- at the end of last year, at the end of third quarter, we had the clearance for our standing system, which allows an occupant to come to a nearly vertical standing position as the normal able bodies would have, with all sorts of intuitive and clinical benefits. You can imagine the social benefits of being at eye-level with other people around, but also bone strength is enhanced by loading bones, cardiovascular strength is enhanced by having a greater vertical rise of blood flow between the level of the heart and feet, and respiratory and digestive benefits occur also.

Not only was it important for us to come out with a great product that had great kinematics, but it was important for us to come out with the chair design for the reimbursement system. Our chair is uniquely designed for group 3 reimbursement, which is a level lower than the top competitors reimbursement level, which should mean it's easier to get patients funded by their insurance carriers for this essential benefit. We're very excited about having set out to do that from the beginning of the product and seeing that now available in the marketplace today. It's truly a solution with no compromises.

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Robert James Labick, CJS Securities, Inc. - President & Director of Research [6]

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That's great. And then just sticking with the wheelchair. I know that you're the only public stand-alone company in the space. So it may be hard to speak about this. But could -- if you can, can you discuss a little bit about the position -- or your position on the formularies for some of the large wheelchair providers out there, some of your customers and how it stands this year versus the last few years?

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Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [7]

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I think it's a good question, Bob. And it's important for us to have our customers have access to our products, so that their sales and clinical teams can make them available to their clients. And over the last 4 years or 3 years, since the consent decree, we've been working hard to balance our internal costs, which are getting better and better, with what our customers need in order to hit their targets of deploying products to their markets.

This year, I think we have even better price positions based on better and improving cost positions of our products. And I think we have a lot of interest from all of our customers based on new products, so we expect things to be even better this year. We have good relationships with all our customers worldwide. And I think, internally and externally, we're mutually excited about the portfolio of new products that help all of us. And all the clients out there worldwide who are looking for mobility solution.

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Operator [8]

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We'll now take our next question and that will come from Mike Matson with Needham & Company.

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Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [9]

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I wanted to ask about the North American mobility and seating business. I don't know if you can disclose what the growth was there if you strip out the discontinued products? But with the powered wheelchairs, I assume that saw significantly stronger growth than what the overall number was.

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Kathleen P. Leneghan, Invacare Corporation - Senior VP & CFO [10]

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Yes, it would have been, Mike. The growth in the total segment was 2.8%. We haven't really disclosed the specifics of how much was power versus manual, but as you noted, manual was down, so the growth would definitely be higher than the 2.8%. We saw nice successful growth on the standard in the quarter, which is fine.

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Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [11]

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Okay. And then the revenue guidance, it's good to see the 2% to 4% constant currency, but that's a fairly significant step-up from where you are or were in 2019. So how -- what's your confidence level in the ability to deliver that, especially considering that it seems like they're going to be more kind of reliant on what happens in the second half of the year.

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Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [12]

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Yes, it's a good question, Mike. I think this year, there are a lot of precedent actions that we are executing in the first and second quarter so that, that growth can happen later in the year. As we talked about previously, we need to get this IT system in place and underway. They'll have many benefits, much better customer engagement by being simple to do business with, but it really will enable us to eliminate some of the other redundant capabilities we have and the inefficient way that we do business today with our legacy systems, which are quite old and require a lot of manual workaround to be as effective as we are. So those things can only really happen in the first and second quarter, which then gives us the ability to streamline our business and grow sales even more in the second half. And then, of course, as we continue coming out with new products in the year, especially with the power wheelchair and respiratory products that are going to come out through the year, these sales will occur naturally at the later part of the year. First quarter, as we mentioned earlier on the call, is going to be the typical seasonal kind of flat. I think second, third and fourth quarter should be much more interesting.

Your other question or part of it was around confidence. I think what we're doing this year is absolutely within the bandwidth of what we've accomplished in the last couple of years and seeing what we did last year with new product innovation, but lack of commercialization of those has us really already focused this year around meaningful steps to drive growth from new products and just have new products. We've got to really commercializing well and things are underway to make sure that happens.

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Kathleen P. Leneghan, Invacare Corporation - Senior VP & CFO [13]

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And we're going to make additional investments in the sales side of the house as well as demo to help drive that revenue.

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Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [14]

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Okay. And then finally, just on the convertible debt. So with the actions you took in the fourth -- or the third quarter, I guess, or/and fourth quarter, you've reduced the outstanding portion of that first tranche '21 -- that's due in '21 to about $61 million, I think. So what are your plans for the remaining $61 million that's due?

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Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [15]

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Yes. So number one thing is focused on profitable growth and EBITDA enhancement, which gives us increasing flexibility in normal commercial banking relations over time. I think in the meantime, if you look opportunistically how to manage our cash, how to use all the facilities we have to manage that, and hopefully, investors appreciate that, we're looking at this based on the actions we took in 2019. I don't know, Kath, if you'll add anything to that?

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Kathleen P. Leneghan, Invacare Corporation - Senior VP & CFO [16]

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No, I think that's the key, is returning to the profitable growth and generating positive cash flow will give us much more options on how to deal with it, though.

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Operator [17]

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And now we'll take a question from Matthew Mishan with KeyBanc.

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Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [18]

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Great. Just bear with me on my math, I'm on the West Coast, it's really early right now. As I'm looking at the spacing of EBITDA, 3Q is typically your best EBITDA quarter. And if I'm understanding the run rate correctly, you're thinking that you're exiting the fourth quarter with $21 million to $25 million of EBITDA. I mean, is EBITDA flat in the first half and in the second half, the majority of -- the vast majority of the EBITDA for the year is generated?

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Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [19]

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Well, I think, two things. We're expecting a normal seasonal profile and as you and others will remember, quarters in 2019 stacked pretty aggressively towards the end of the year. In the first quarter, we accumulated under $2 million worth of EBITDA. By the second quarter, we had accumulated $4 million or $5 million, and we went from $4 million to $5 million by June 30 to $28.7 million by the end of the year. So we have a capability to do that. The seasonality in 2020 should be similar. And what's also going to be different in 2020 as we expect an even stronger fourth quarter relatively from cost savings and new products that are happening earlier in the year. So maybe the third, fourth quarter relative balance to each other will be a little different. We expect a pretty strong back half of the year.

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Kathleen P. Leneghan, Invacare Corporation - Senior VP & CFO [20]

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But you're right. I think it's going to -- as you see the seasonality in 2019, 2020 would have similar seasonality.

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Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [21]

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Okay. And as you think about that 2% to 4% growth, how should we be thinking about that like North America versus Europe? And now that you're giving guidance, on top of that, what would be the expected FX headwind in 2020 as well?

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Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [22]

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We continue to expect a reasonably similar constant currency sales growth in Europe. The big change this year should be more biased towards North America and really bringing both of those regions up to that 2.4%. The products that we have coming out end up going global in this year and commercialization efforts are underway in both regions to make sure that they're very effective. Markets are healthy in both places, probably the biggest incremental increase will be in North America. It's been a long time since we've been at that level of revenue growth.

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Kathleen P. Leneghan, Invacare Corporation - Senior VP & CFO [23]

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On the FX side of the house, the euro, it's roughly at a $1.10 range. And that really is where our plan is based right now. So as long as that stays pretty much in that range, we should be good. We do enter into hedge contracts on both the sales as well as the cost side of the house to protect the company against FX. And those are normally entered into at the average of the Q4, it would be a Q4 '19 rate. So obviously, we don't have a crystal ball as to where FX is going to go. But right now, based on where we see the rates, we think we're okay.

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Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [24]

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So reported and organic constant currency growth is about the same?

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Kathleen P. Leneghan, Invacare Corporation - Senior VP & CFO [25]

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About the same right now, yes.

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Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [26]

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And then just looking at the working capital, what was the -- and maybe it was -- maybe I'm just looking around, what was the driver of the $18 million increase in accounts payable?

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Kathleen P. Leneghan, Invacare Corporation - Senior VP & CFO [27]

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You're looking at the balance sheet, the reported balance sheet?

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Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [28]

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Yes. Yes.

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Kathleen P. Leneghan, Invacare Corporation - Senior VP & CFO [29]

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Yes. You can't really look at the reported balance sheet because there would be FX within that. So if you take a look at our working capital for the full year, you would see the main driver of the reduction is in inventory. That's really where it's driving. You can't go off of the balance sheet.

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Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [30]

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And then last question is a little bit of a bigger question. We've seen a lot of companies talking about connectivity and data, making a transformation to digital health. You guys were ahead of this with LiNX a couple of years ago. Where are you at with LiNX now? And are customers becoming more interested in that kind of offering?

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Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [31]

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Yes, it's an interesting point. And we're pleased to have had 3 years of development out in the marketplace with that having been launched in August of 2017. We have the same technology going, our oxygen concentrators in -- also in 2017. And as we get out and talk to customers about managing total cost of ownership and making sure that the right modality of their solutions are in the hands of reimbursed clients, that's becoming more and more interesting than more products that we have out there. The new thing, I think, that's occurred in the last year is probably very cost-effective ways to put technology on product and have been the easily compliant with whatever regulatory regime is in effect in a market that's being served. So we see that expanding across our portfolio in the future and/or expanding more strictly. LiNX has given us a really good platform to understand how to do the normal kinds of things that make it interesting day-to-day, not only for end users, but providers and the clinicians who are working with patients. So that gives us a head start, I think, going forward.

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Operator [32]

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And Chris Cooley with Stephens has the next question.

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Christopher Cook Cooley, Stephens Inc., Research Division - MD [33]

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Just a couple for me. If you could maybe get a little bit more behind the results in respiratory for the course of the fourth quarter and then use that as a launching pad to think about the expectations for growth in this coming year. I guess 2 things specific I'd like to start with. Could you maybe help us kind of compare and contrast the growth in both the POC offering, and what's maybe at HomeFill with that versus traditional concentrator business? I know you had bundled that exiting the second half of last year. I'm just kind of curious about what you saw there? What you learned from that? And then how you affect growth going forward in that category? And I've got a quick follow-up.

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Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [34]

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Yes, sure. The respiratory market has been probably the most dynamic market that Invacare serves over the last few years, with changing in reimbursement and strong shifts in different modalities. The battery-powered portable oxygen concentrator has been an important part of our offering, and we try to be out there with a solution that's as innovative as we think providers need to have and in ways that end users would want. There's certainly a lot of advertising in the world that makes end users think that this is the only solution for ambulatory oxygen and certainly a great one, and we think we have a great full feature product out there. I think the sense that I have from a lot of customers I've talked to worldwide in the last 6 months is people are starting to -- providers are starting to realize what an expensive modality that is to have in a rental market, in a rental fleet. So I think people are coming back and looking at HomeFill, which when you compare the 5-year or 10-year operating cost of the HomeFill System, which gives ambulatory oxygen for more ambulatory breathing time than any unit of the equivalent weight that's battery powered, including our own, it also has no vibrations, no noise and no heat, it's really a fantastic solution and the total cost to own that is miniscule compared to portable oxygen concentrators.

Now that's it. There are some places where affordable oxygen concentrator that's based on battery power might be the better solution, which is why this year, we launched the -- I think the world's truly only hands-free device because now with remote control through a smartphone, someone can put it in a backpack mode and really have both hands-free. So now as we're out talking to customers worldwide about our respiratory portfolio and ambulatory solutions we have, we have things that are great, that are based on HomeFill solutions, really low cost, really quiet, really lightweight for the durable solution that it is and they give continuous oxygen flow, which you can't get in a battery-powered solution. And then for those who really want an active lifestyle, we're the only game in town in that regard. So we feel like we're going to have a lot of good ambulatory year in 2020. And then we've done a tremendous amount of work to innovate on our stationary oxygen concentrator aligned with huge investments in reliability improvements over the last 18 months, which are reflected in what customers are seeing and experiencing and that will lead us to a whole new product line of stationary concentrators in 2020.

So given all that, we're in a very, very different place than where we were a year ago, when respiratory was in a substantial decline in North America initially as a result of reimbursement changes and then later as a result of internal changes that we made, not to chase price and low cost, but really to deliver the best units that we can put out in the marketplace.

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Christopher Cook Cooley, Stephens Inc., Research Division - MD [35]

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I guess just as a quick follow-up to that. Can you realize the value of that proposition? I think under the bundling, you were previously able to bill both under the [T90] stationary tank, but also the POC code. And really what I'm wanting to get out here with the investment that you're making in the respiratory side, how does this change the operating margin profile of that business as we think about calendar '20, the current year, and then going forward longer term?

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Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [36]

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Sure. We've reimbursement up to our providers who are the experts in reimbursement in their markets, and they know very well how to deal with getting things reimbursed. I have to defer to market-specific experts on that. But I think the margin in our business, despite being substantially smaller in the last year, is incredibly better due to cost savings and really focusing on reliable solutions that stand up in the marketplace. That's been a really big durable driver of improvements in the respiratory business. We came into 2019 without a lot of optimism in the respiratory business, which means we didn't hold on to any fringe costs that might have been supported by an early comeback in revenue. We really took it all out and we put a lot of technical innovation into the unit, sound principles that ends up making a big change in what I think now is market-leading reliability in those products that customers are seeing already. So that's our margin. And that should propel us into next year as providers don't always look at the lowest price. They want the lowest total cost of ownership, and we can demonstrate there's such justifiable difference there.

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Operator [37]

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With that ladies and gentlemen, this will conclude your question-and-answer session. I'll turn the call back to your host for closing remarks.

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Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [38]

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Thanks, Jake, and thanks, everyone, for their time and attention on today's call. Kathy, Lois and I are available for follow-up questions throughout the day and tomorrow. Thank you. Have a good day.

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Operator [39]

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And ladies and gentlemen, this does conclude your conference for today. Thank you for your participation, and you may now disconnect.