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Edited Transcript of IVC earnings conference call or presentation 8-Nov-17 1:30pm GMT

Thomson Reuters StreetEvents

Q3 2017 Invacare Corp Earnings Call

ELYRIA Nov 8, 2017 (Thomson StreetEvents) -- Edited Transcript of Invacare Corp earnings conference call or presentation Wednesday, November 8, 2017 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lara L. Mahoney

Invacare Corporation - VP of IR & Corporate Communications

* Matthew E. Monaghan

Invacare Corporation - Chairman of the Board, CEO and President

* Robert Kenneth Gudbranson

Invacare Corporation - Senior VP, CFO & Treasurer

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Conference Call Participants

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* Blevin Brown

* James Philip Sidoti

Sidoti & Company, LLC - Research Analyst

* Matthew Ian Mishan

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

* Robert James Labick

CJS Securities, Inc. - President

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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 2017 Third Quarter Conference Call and Webcast. After the management overview, we will open the call to questions. (Operator Instructions) This conference is being recorded today, Wednesday, November 8, 2017. I would now like to turn the call over to Lara Mahoney, Invacare's Vice President of Investor Relations and Corporate Communications.

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Lara L. Mahoney, Invacare Corporation - VP of IR & Corporate Communications [2]

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Thank you, Alan. Joining me on today's call from Invacare are Matthew Monaghan, Chairman, President and Chief Executive Officer and Rob Gudbranson, Senior Vice President and Chief Financial Officer. Today, we will be reviewing our third 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 the link to our webcast on www.invacare.com/investorrelations. On our Investor Relations page, you will also find a copy of the webcast slide presentation that we'll refer to during today's call. 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 slide and in our third quarter earnings release. 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, constant currency sequential net sales, adjusted earnings and loss and EBITDA; please see the explanatory note in the Appendix of our webcast slide and in the related reconciliations in the earnings release posted on our website. Also, please note that the company completed the divestiture of Garden City Medical Inc. in the third quarter of 2016. Garden City Medical 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 Monaghan.

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Matthew E. Monaghan, Invacare Corporation - Chairman of the Board, CEO and President [3]

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Thank you, Lara, and good morning. We've made meaningful progress in a number of key areas this quarter and I'm pleased to give an update. As Lara mentioned, our company is undertaking a comprehensive transformation that is essential for reinvigorating the growth and profitability of our business. In mid-2015 we made substantial changes to our company's strategy to focus on our stronger technical competencies in clinically complex products. Since making this change, we have focused our resources on providing clinical solutions for complex rehabilitation in post-acute care and 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 less accretive parts of the business focusing our resources on patient-centric solutions to significant healthcare needs. Our transformation program has 3 phases as you'll see on Slide 3 beginning in 2015 and taking us through the next several years.

This is a basic crawl, walk, run kind of program. In Phase 1, we defined our strategy and began to reorient our business specifically in North America. Phase 2 has been focused on realigning our infrastructure with our new sales level and mix of products while also leveraging the North America commercial shift. Throughout all this, we continued to focus on creating a culture of quality excellence as our #1 priority. In the second half of 2015 and throughout 2016, we did much of the heavy lifting of Phase 1 in North America. We retained and attracted new talent to our sales force, we have a pipeline of great new products and programs that are starting to grow and our commitment to culture, quality excellence as well as to satisfying FDA's requirements under the consent decree at our Corporate and Taylor Street manufacturing facilities in Elyria, Ohio.

As a result, we can sell power wheelchairs from the Taylor Street facility without restrictions effective since late July. Now well into Phase 2 of our transformation; we've moved forward in the consent decree, we're seeing growth in new products, we're making consistent progress in reshaping our business for cost and efficiency and we have completed the portfolio and sales reductions in North America/ HME. As a result, third quarter constant currency sequential net sales in North America/ HME grew 1.6% compared to the second quarter of 2017 driven by mobility and seating and lifestyle products. This indicates that we have reached a turn in the North America/ HME business where our transformation work has been most significant, primarily as a result of new product offerings and increased commercial effectiveness. On Slide 4, you'll see the results of third quarter 2017 compared to the key financial indicators of Phase 1 and Phase 2 that we referred to in prior presentations.

Briefly, we have expected reduced sales as we shipped less accretive products, increased gross margin as a percentage of net sales to indicate mix shift, temporarily higher SG&A and negative cash flow in the early phases before gross profit dollars increase, SG&A comes down and cash flow improves. Compared to the third quarter last year, consolidated constant currency net sales decreased 4.5% excluding the Garden City Medical business that was divested in September 2016. The constant currency net sales increase in the Asia/Pacific segment was more than offset by the declines in Europe, North America/ HME and IPG. Compared to the third quarter last year, gross profit decreased $2.7 million to $70.7 million with the Garden City Medical divestiture accounting for $1.6 million of the decline. Gross margin as a percentage of net sales increased 80 basis points to 28.2% driven by the strategic mix shift towards mobility and seating products and reduced freight costs.

Gross margin continues to be an important measure that we're monitoring to ensure commercial and product effectiveness. Excluding the divested Garden City Medical business and the impact of foreign exchange, SG&A decreased $1.4 million or 1.9%, primarily driven by reduced legal and employment costs partially offset by increased bad debt expense. Free cash flow in the third quarter of 2017 was negative $4.8 million. The company's focus on working capital led to the $17.7 million improvement in free cash flow compared to the second quarter of 2017. EBITDA in the third quarter was negative $2.2 million compared to negative $1.1 million in the third quarter 2016. The decrease in EBITDA was driven by lower net sales. Compared to the second quarter of 2017, EBITDA improved by $9.8 million. While not noted on the slide, adjusted net loss per share was $0.41 compared to a loss of $0.37 for the third quarter of 2016.

The increase in adjusted net loss was driven by lower net sales. The company incurred net interest expense of $6.7 million in the third quarter of 2017 compared to $4.4 million in the third quarter of 2016. The increase in interest expense was primarily due to the issuance of convertible notes in the second quarter of 2017. We're also measuring constant currency sequential net sales, which we believe gives us a more timely financial measure for both evaluating our core operating performance as we work through the transformation and indicating a major inflection point in the recovery of our business. This measure removes the effect of discontinued products and the shutting of less accretive products throughout the year. On Slide 5, you can see the sequential comparison of reported net sales as we move through this transformation. You can see the flattening of the sales decline that has been largely the result of intended sales reductions of less accretive products.

In the third quarter, constant currency sequential net sales increased 3.7% compared to the second quarter 2017. The constant currency sequential net sales growth was driven by Europe, North America/ HME and the Asia/Pacific segment. Importantly, North America/HME grew 1.6% driven by mobility and seating and lifestyles products. As we do each quarter, we want to compare what we have done to what we said we would do so we continue to plot our recent quarter with the prior quarter since the transition started in 2015. You will see this on Slide 6 of the presentation. This is our do-say ratio page. On the page, we show the sequential and year-over-year trends.

Here we see that third quarter net sales decreased as we discussed. Year-over-year net sales continued to decline in North America where the transformation is most significant. This is a mix of consequences from the transformation and continued weakness in the respiratory business amid product mix shift. Sequentially, North America/HME net sales increased in the quarter at levels even better than we expected. We have confidence it will continue to improve. The gross margin as a percent of net sales were looking for improvement from mix shift. In the third quarter we once again saw this metric improving. Gross profit dollars, as we've talked about over time, were somewhat variable. That's the result of the titrating the business we are decreasing and the business we're building back. Constant currency SG&A, excluding the divested Garden City Medical business, was favorable during the quarter as we're managing expenses.

We'll continue to make investments in the business as appropriate. Free cash flow negative, but a significant improvement compared to the prior 2 quarters as a result of the inventory reductions and seasonal improvement. As we've discussed, Invacare is in the midst of a significant renovation of our business. We're introducing new products, we're seeing effectiveness of the North America HME commercial team and we're beginning to grow mobility and seating as a result of new products and our ability to sell freely from the Taylor Street manufacturing facility.

I'll now turn the call over to Rob Gudbranson, our CFO, to discuss the performance of the segments and additional financial results for the quarter.

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Robert Kenneth Gudbranson, Invacare Corporation - Senior VP, CFO & Treasurer [4]

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Thanks, Matt. Turning to Slide 7, all comparisons are with respect to the same quarter last year unless otherwise noted. For the third quarter of 2017, European constant currency net sales decreased 0.5%. The slight decline was primarily driven by decreases in respiratory products partially offset by increases in mobility and seating products. In the third quarter, operating income increased by approximately $0.3 million principally due to favorable sales mix and favorable foreign currency partially offset by unfavorable manufacturing variances and increased SG&A expense. Gross margin as a percent of net sales and gross profit dollars, both increased compared to the third quarter last year. For the third quarter, North America/HME constant currency net sales excluding the divested Garden City Medical business decreased 12.9%.

The decrease in constant currency net sales compared to the third quarter of 2016 was driven by lower sales of lifestyle and respiratory products and to a lesser extent mobility and seating products. Operating loss increased by $1.4 million primarily related to the net sales decline and unfavorable manufacturing variances partially offset by reduced freight, R&D, SG&A expense and favorable sales mix. Gross margin as a percent of net sales increased while gross profit dollars decreased compared to the third quarter last year. Constant currency net sales in the IPG segment decreased by 9.1% driven by declines in all product categories. Operating income declined $0.3 million principally due to the net sales decline and increased warranty expense partially offset by reduced SG&A expense.

Gross margin as a percent of net sales increased while gross profit dollars decreased compared to the same period last year. For the third quarter of 2017, Asia/Pacific constant currency net sales increased 17.9%. For the third quarter, operating income improved by $0.9 million compared to the third quarter of 2016 reporting positive $0.4 million of operating income as a result of increased net sales, favorable sales mix and reduced SG&A and R&D expenses. Gross margin as a percent of net sales and gross profit dollars, both increased compared to the same period last year. Turning to Slide 8. The total debt outstanding as of September 30, 2017 was $302.1 million, which was comprised of $270 million in convertible debt and $32.1 million of other debt principally lease liabilities. The company had zero draw on its revolving credit facilities with availability of $42.7 million as of September 30, 2017.

The company's cash balances were $156 million as of September 30, 2017 compared to $124.2 million as of December 31, 2016. The company's cash balances increased due to the net proceeds from the issuance of convertible debt in June of 2017, which was partially offset by cash used by operations. At the end of the third quarter, days sales in receivables were 49 days, up from 41 days as of December 31, 2016 and 43 days as of September 30, 2016. At the end of the third quarter, days in inventory were 76 days compared to 65 days as of December 31, 2016. The days in inventory for the quarter ended September 30, 2017 were favorable to the quarter ended June 30, 2017 by 3.4 days. The reduction in inventory led to a cash flow benefit of $14 million in the third quarter.

I'll now turn the call back over to Matt for additional comments. We can then address questions.

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Matthew E. Monaghan, Invacare Corporation - Chairman of the Board, CEO and President [5]

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Thank you, Rob. As you can see on Slide 9, we highlight the essential themes of our Phase 2 objectives. First, we continue to make progress on our quality systems and culture of quality excellence. In July we announced progress with quality excellence and the consent decree. Since then, we are able to sell power wheelchairs freely from Taylor Street manufacturing facility in Elyria, Ohio. Providers, clinicians and consumers have welcomed us back into the marketplace and we are pleased to see momentum building in our Invacare line of custom power wheelchairs from the Taylor Street facility even though we've had some major milestones and quality remains our #1 priority. Over the next 5 years, we will have ongoing third-party audits at our corporate and Taylor street facilities as required by the consent decree. In September we announced that we received a warning letter at our Alber subsidiary in Albstadt, Germany.

We're working to address the findings there and continue to make improvements in all our facilities around the globe. Also in Phase 2, we've continued to launch new products. New clinical product platforms are an important component of our transformation and we're seeing consistent cadence of valued products coming from our innovation pipeline. In 2017 we've launched 10 new products. Most recently we expanded our healthcare informatics offering with the launch of the enhanced Invacare Platinum Mobile Oxygen Concentrator with Connectivity. This is the company's second application of product informatics following the launch of the LiNX technology on the new Invacare TDX SP2 power wheelchair in August this year. Continuing through our Phase 2 objectives, we remain focused on commercial output. North America/HME had its first quarter of sequential growth as we discussed earlier.

We expect IPG to follow, but that will take time. Also we will gradually begin to apply the transformation to the Europe segment, which may slightly reduce the segment's net sales as it ships product mix towards more clinically valued higher margin products. Also in Phase 2, we are continuing to make progress in reshaping the business for cost and efficiency. In 2017 we have announced actions expected to yield $14.9 million in annualized savings. These actions will help us optimize our infrastructure and reduce cost. For example, in June we announced the closure of our Suzhou, China manufacturing facility, which continued to wind down during the third quarter. Products manufactured at the Suzhou facility will transfer to Invacare facilities closer to our regional Europe and North America customers. In July we announced the upcoming transfer of manual wheelchair production from our Dio, Sweden facility to our Fondettes, France facility.

This move allows us to leverage our manual wheelchair center of excellence in France and focus the Sweden facility on serving the specific needs of our Nordic customers. Further, we're continuing to take action to be more efficient with lower cost through the rest of our business. We must grow sales in order to leverage these cost improvements and see the benefits in net income. The scope of our commercial transformation is significant. We're pleased with the progress in our new product pipeline and infrastructure realignment and we look forward to the results of our commercial investment. As we progress through our transformation, we will expand the scope of what we're doing to include a heavier emphasis on sales, reducing costs and improving efficiency. Our priorities remain emphasizing the culture of quality excellence and achieving our long-term earnings potential.

We remain confident in the earnings potential of business and our ability to get there with the current mix of business. We appreciate the continued support of our shareholders and associates through this process. Before we open the phone lines for questions, I'd like to take a moment to recognize Rob Gudbranson. Last week we announced that Rob will be leaving the company after 9 years as CFO of Invacare to take a new opportunity. I appreciate Rob's support as the finance partner during my transition as CEO and through the early stages of our transformation. He has ensured our balance sheet has remained strong and has led us through 2 convertible debt transactions. Rob, on behalf of everyone at Invacare and our Board of Directors, thank you for your commitment to Invacare and your financial leadership. Good luck in your new role.

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Robert Kenneth Gudbranson, Invacare Corporation - Senior VP, CFO & Treasurer [6]

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Thank you, Matt.

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Matthew E. Monaghan, Invacare Corporation - Chairman of the Board, CEO and President [7]

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As we noted in last week's release, Rob will remain with the company through November 26. We'll be launching the search to identify the successor and we're working through those details now. In the meantime we are fortunate to have Kathleen Leneghan, Invacare's longstanding Vice President and Corporate Controller, who will assume the role as Interim CFO. Kathy has been with Invacare for 27 years serving in various financial roles in North America and Europe. She has serviced as Vice President and Corporate Controller since 2003. Prior to joining Invacare, Kathy was an audit manager with Ernst & Young LLP. I have full confidence in her ability to lead the finance operations and we expect a smooth transition.

With that, we'd like to thank you for taking the time for being on today's call. We'll now open the phone line for questions. Alan?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will take our first question from Bob Labick with CJS Security.

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Robert James Labick, CJS Securities, Inc. - President [2]

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First, I just wanted to start and offer my best wishes to Rob. Rob, I've really enjoyed working with you and appreciate all your help over the years.

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Robert Kenneth Gudbranson, Invacare Corporation - Senior VP, CFO & Treasurer [3]

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Bob, very much enjoyed the time with you too. I'm glad you're covering the company.

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Robert James Labick, CJS Securities, Inc. - President [4]

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And since you are leaving, I was wondering if -- don't tell Matt, but if you could give us some guidance before you go. That would be helpful in terms of earnings.

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Robert Kenneth Gudbranson, Invacare Corporation - Senior VP, CFO & Treasurer [5]

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I'll defer to our Chairman, CEO and President.

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Robert James Labick, CJS Securities, Inc. - President [6]

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Just on to business now. Obviously you announced a nice exciting new product in respiratory with the Connectivity and LiNX and such. Can you just expand on that product. Is there anything like it out in the market? Is it out there yet? Kind of has there been initial feedback? What's the go-to-market strategy and what are your -- is it U.S., Europe? Just give us more on that product because it sounds pretty exciting.

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Matthew E. Monaghan, Invacare Corporation - Chairman of the Board, CEO and President [7]

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Yes, we are very excited about that. That is the growth platform and form factor in the marketplace. We see a lot of excitement around battery- powered portable oxygen concentrators. Invacare has been in that market for a long time with larger products and we're happy to have a very competitive product in output, rate, noise, great battery life, great user interface and now with a wireless informatics platform; which we think gives a lot of benefits to users so they know more about their unit, easier access to provider input, online help documents, things like that. And then for providers, it's essential for us to help providers be as effective as they can be and we think it's essential and important for providers to know what's going on with their asset, online help, other things like that. We're excited to have a platform for growth. I think, Bob, as you know from second quarter and third quarter with the launch of the TDX SP2 with LiNX where we're applying the company's internal technology to be able to develop this kind of platform, we're excited about the future that this brings. Success in healthcare is always about the same or better outcomes with the same or fewer dollars for everyone involved in the healthcare chain and we believe informatics that help end users, providers and clinicians is good for everybody. So, excited about expanding that to our platform.

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Robert Kenneth Gudbranson, Invacare Corporation - Senior VP, CFO & Treasurer [8]

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And Bob, I'd just add that from my vantage point, we're talking about a product we would be using globally so it would be Europe and North America and I'd emphasize too that this adds on to the LiNX capability we've already talked about. So, it's an important progress for the company and glad you asked it.

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Robert James Labick, CJS Securities, Inc. - President [9]

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Great. And then moving on, you spoke about it on your last slide a little bit in terms of the cost savings. Can you tell us how much of the cost savings are now seen in the P&L and how much more should be seen I guess over the next year or so and if there's additional opportunities for cost savings going forward?

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Robert Kenneth Gudbranson, Invacare Corporation - Senior VP, CFO & Treasurer [10]

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So Bob, let me take a shot at that and we can add to it additionally. When we talked about Suzhou, I think we indicated that there'd be annualized savings about $4 million and we'd be done with it sort of in Q4 this year. So going into '18, I think we'll see more benefit from that with clearly some benefit in Q4. Then we talked about the movement in Europe of the chairs, should be able to [fund] that. I think our annualized savings in that were about $1.6 million and we figured that would be done in Q1 of '18. That's what we said I think at the time. So, those are some nice benefits there. I think the key for us is to show the gross profit dollars stabilizing for the company and growing by getting the topline going so that we get some of those benefits as opposed to necessarily seeing them offset some pressure on the business. So I think with Taylor Street now being able to go full production and some other improvements, those are the important things we have to show investors, but those are the 2 most important reductions in terms of both footprint and people that we've gone through and we take those seriously. I think we'll always continue to look at that depending on how the business is doing.

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Matthew E. Monaghan, Invacare Corporation - Chairman of the Board, CEO and President [11]

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And then to your question about future opportunities. Our objective is to be the company in this industry that's easier to do business with and as a result of that, I'm sure we'll be streamlining efficiencies that will result in lower cost. But as Rob mentioned, despite having all these cost savings, we need the sales leverage to see those in net income. So, those are real savings that we expect to be materially externally visible as we grow the topline and contribution part.

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Robert James Labick, CJS Securities, Inc. - President [12]

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Okay, great. And then last one. Obviously saw some nice sequential growth in the mobility and seating and North America/ HME in general. So I apologize, I missed the very beginning of the call. But can you just discuss the kind of reception so far with the new TDX SP2 without the consent decree, you've got a couple months under your belt so far, and just how the process of ramping up is going? Is it reaching your expectations? And I know you had the nice outlook for continued sequential growth next quarter. So, is that based on orders you've received right now or what's the kind of visibility on that?

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Matthew E. Monaghan, Invacare Corporation - Chairman of the Board, CEO and President [13]

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Thanks for the question, Bob. I think we were right on the center of the target in terms of great functionality in that product as we've discussed on other calls earlier in the year. We don't want it to lead investors to expect external growth from that until 2018. We've talked about this very long cycle quote to cash, quote to sale. We're having great commercial engagement, we have great clinical engagement. The end users are really very enthusiastic about the product, but it's a long cycle product and we expect that to grow over time nicely.

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Lara L. Mahoney, Invacare Corporation - VP of IR & Corporate Communications [14]

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And the great news is I mean the increases that we're seeing sequentially are also driven by the other mobility and seating products that we've launched, the investments we've made in the commercial sales force becoming more effective. So while the Taylor Street product and the TDX SP2 are very important to our future success so what we're seeing so far is just what we've invested and the products we've launched already.

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Operator [15]

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And we will take our next 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 [16]

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I just want to start with Europe. Has the plan changed in the European mix storage yet or is the moderation and the constant currency growth in the last 2 quarters driven by a change in the underlying fundamentals?

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Matthew E. Monaghan, Invacare Corporation - Chairman of the Board, CEO and President [17]

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No change in the underlying fundamentals. We have a very solid business in Europe. I think there's great alignment between our products and our company's ethos of making really durable products that can be reused and reused and a lot of the European healthcare programs see that as a benefit to total cost of care for the populations. Actual purchase price may not be the lowest that's available, but due to the durability and reusability of products in that category we have very good business there. But as we expand our portfolio of clinically complex products, we want to make sure the Europeans are taking advantage of all those in their marketplaces and a simple part of it is just making space in the commercial programs in Europe to train on these, engage with customers on these and get those out there and we do that by shifting mix away from some of the lower margin, less strategic businesses there. But fundamentally, nothing different in the European marketplace. Rob, would you like to comment?

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Robert Kenneth Gudbranson, Invacare Corporation - Senior VP, CFO & Treasurer [18]

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No, I agree with you, Matt. I think the other thing I'll just say is just to reiterate what we said in the call that we're down 0.5% constant currency sales with some pressure on respiratory, a little bit on lifestyles; but they grew in mobility and seating, which is where we ultimately want to see it grow. And I guess the other thing I'd just throw out there is that if I look at the operating margin for Europe from the second quarter to the third quarter, it went from 5.5% to 8.4%. So 8.4% clearly always wanting to improve, but that was a strong quarter and I want to make sure to recognize the Europeans for what was a really good quarter.

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Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [19]

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And then could you -- just a follow-up to that question. Could you give us a sense of the size and the timing of the potential mix shift?

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Matthew E. Monaghan, Invacare Corporation - Chairman of the Board, CEO and President [20]

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Well, a couple of factors. So, we won't guide you today specifically on that. This is voluntary and very different than the North American program. The North American program was a substantial transformation over a relatively short period time given that significance of it. Europe is totally different magnitude. This will bobble around the zero mark for a little bit, but nothing close to North America and always looking for the right kind of mix shift as we do that.

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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 then back to North America/HME, the language in the release was a little bit more positive on the 4Q improvement versus 4Q stabilization. What gives you confidence in that improvement? Have you seen the order book build in the TDX? Did you get a large order for the POCs? What's driving the confidence in the sequential improvement?

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Matthew E. Monaghan, Invacare Corporation - Chairman of the Board, CEO and President [22]

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Well, I think we have good commercial effectiveness that we're seeing; some of it's visible in the book of business. Not all of our business has a backlog that's very long. I want to make sure people understand this third quarter in some context. So as we had talked about previously, we were thinking we'd have flat third to fourth quarter, a couple of quarters to reflect a flat bottom to rebound and we had a little bit better third quarter than we expected, What I want people not to expect is to say well, that's a V-shaped recovery and all of a sudden we're on this rapid trajectory. There's going to be couple of quarters of inertia that we've got to move, but I have a lot of confidence in the North America commercial team, the sales, the backlog of business we have, the commercial interest in the products; it's not all literally in the backlog, but tremendous amount of engagement and I think fourth quarter should be decent and I think we're at a turning point of inflection of North America/HME. IPG is a little behind that because we started 3 quarters later and it's a capital expense kind of cycle in that business. So not everything in the Americas is going to turn quite rapidly, but I think the shift is pointed at a different direction in HME now.

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Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [23]

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Alright. And then last question on the portable oxygen concentrators. Could you give -- is there a way for you to give us a sense of what the baseline level of sales are for those? What percentage of respiratory? And then how many sales people have you allocated for the POCs this year and then what's the plan for next?

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Matthew E. Monaghan, Invacare Corporation - Chairman of the Board, CEO and President [24]

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Well, EZ starting point was roughly zero at the beginning of the year because it was a new product launch. And as we talked about, there's a fairly judicious cycle of valuation that our customers go through; there are engagements at high level, training at lower level, typically they buy small groups of these products to evaluate over a period of time that might be 90 days or longer if they get their valuation committees back together, look at the features and performance and then they make purchasing decisions on that basis. So, that overall cycle time takes a while. This really didn't get out into the marketplace in earnest until the end of fourth quarter roughly. So, we're just a couple of quarters into getting that out and importantly we're ahead of the fall cycle and we're very excited about our informatics platforms because we think it does a lot for end users to be comfortable with the product, understand what it's doing, see some other things about it, interact with the world around them including their providers more readily and everything we can do to make providers more effective is important to us. So, there's some great features in that for that too. And I expect coming into the fall season, we'll see a good uptick on the portable oxygen concentrator. Beyond that, we don't really break that out as a specific product segment, but we look forward to that to helping us participate in the industry mix shift which has led to some of our respiratory softness over the last few quarters.

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Operator [25]

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We will take our next question from Blevin Brown with Stephens Inc.

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Blevin Brown, [26]

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Rob, Chris and I, we are sorry to you go, but we wish you the best in the future. One, so you guys are kind of talking -- Matt, you just mentioned that the 3Q was a bit stronger than the plan kind of called for that you would expect some kind of flattening over the next couple of quarters. So, I just want to make sure that we're thinking about the cadence right particularly when it comes to margins and SG&A expense. Could you maybe talk to some of the puts and takes there through the remainder of '17 and the beginning of '18 in regards to SG&A spend and maybe how the margins will kind of play through a little bit?

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Matthew E. Monaghan, Invacare Corporation - Chairman of the Board, CEO and President [27]

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So when we were looking into the future of third and fourth quarter, 1 of the core questions was when will we see bottom in North America/HME and we were guiding to expectations that quarter 3 sequentially to quarter 4 would be flat reflecting a couple of quarters that are kind of flattening out, bottom of the turnaround and then presumably growth beyond that. We had expected maybe third quarter would be close to flat compared to second quarter, maybe down a little or up and we hadn't committed to that. It did turn out to be up somewhat and we look forward to growth. Margins, we've long wanted to see gross margin improve as a percent of sales and in most quarters we've seen that except for the third and fourth quarter last year due to the significant sales takedown that was accelerated then. So just generally, we expect relatively consistent gross margin improvement over time as a percent of sales and when we commit is, SG&A is going to come down. Now I want to make sure people don't think on one hand that because third quarter was already better sequentially that that was a V-shaped kind of super ball bounce and now it's all upside. I'm expecting a couple of quarters of relatively flatness or maybe moderate growth, but this isn't off to the races here yet on revenue growth. And then on SG&A and so although we're committed to getting it down, it's not -- don't take your ruler and go from this down straight down to our 10th quarter mid-20% run rate. We're going to have some ups and downs along the way. We are very closely watching headcount and other forms of SG&A spending. So over time we definitely expect to see improvements, but it's early days and it's not going to be a linear extrapolation to be in quite yet on SG&A.

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Blevin Brown, [28]

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That's very helpful. And then just 1 other question on mobility and seating, particularly on the Taylor Street facility. Obviously you guys are not going to see revenue coming from the consent decree action here for a couple more quarters, but could you kind of give us a sense of the costs related to that plan? Are we going to see an increase in costs related to Taylor Street ahead of that revenue as you guys build out the sales force infrastructure and kind of how will that play through over the next few quarters?

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Matthew E. Monaghan, Invacare Corporation - Chairman of the Board, CEO and President [29]

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So, principally the facility is ready to go and it's really just about adding direct labor at this point. The company has done a nice job renovating the facility obviously in preparation for FDA examination, which led to moving forward in the consent decree in the third quarter. But beyond that, we have the physical infrastructure, we have the tooling, the overhead is relatively scaled down as much as it can be and so it's really just add direct labor at this point. I don't know, Rob, if there's anything you want to --?

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Robert Kenneth Gudbranson, Invacare Corporation - Senior VP, CFO & Treasurer [30]

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Blevin, I guess the only thing I'd share which we shared before is for the Taylor Street plan and for dynamic controls plan, we've seen a little bit of unabsorbed overhead that's right around $1.1 million this past quarter, last year same quarter it was about $1.3 million. So, I mean we're headed the right way. I would agree with Matt, I think the answer is look, we may have to add some direct labor but that should easily pay for itself. I think the key is to start eating into that on the sort of overhead and perform better on that front. And since I am talking [inaudible] and I appreciate your comments and glad to have you and Chris covering us.

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Blevin Brown, [31]

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You guys have launched 10 new products this year. You had the LiNX which sounds like a great product and I'm just trying to get a sense of what that cadence looks like into next year. Do you guy -- can you guys give us any kind of sense or any specific products that you would call out in terms of the 2018 pipeline?

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Matthew E. Monaghan, Invacare Corporation - Chairman of the Board, CEO and President [32]

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We don't typically talk about big product launches in the future for obvious competitive and other reasons. We do expect a similar cadence in our net spending as a percent of sale and if you look back at the last 2.5 years really till June 2015, we've had a very consistent cadence of meaningful new products coming out in all of our industry segments; seating, mobility, the respiratory business post-acute care. So, that should continue. And I think importantly as we put informatics on more components of our business, those are platforms for us to grow on as you or I would expect in our consumer lives the way that the functionality on electronic informatics expands generally. But that's a new vector for us for growth.

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Operator [33]

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We will take our next 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 [34]

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I just have one last question. Matt, how are you thinking about guidance for 2018? Are you planning to give it on the fourth quarter call?

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Matthew E. Monaghan, Invacare Corporation - Chairman of the Board, CEO and President [35]

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Not clear yet. I wanted to help you and other analysts accurately portray what we're doing and be clear. There have been a tremendous number of big moving parts in the past and we're getting through many of those. I think when we get to the end of the fourth quarter, we'll look out there. There's maybe something between nothing and just the 10th quarter long-term view that we'll get our heads around in a simplified way. And you've provided feedback as have others in terms of what will make that useful. So, that's definitely on our mind. We'll see how it goes at the end of the fourth quarter. I am sensitive to that need.

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Operator [36]

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And we would take our next question from Jim Sidoti with Sidoti & Company.

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James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [37]

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Can you hear me?

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Matthew E. Monaghan, Invacare Corporation - Chairman of the Board, CEO and President [38]

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Yes, Jim. Good morning, thanks for calling.

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James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [39]

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Sorry if I'm asking things you've already talked about, I've been bouncing around a little bit this morning. But first, congratulations to Rob and all the best, I hope everything works out for you. It's been very good working with you in the past.

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Robert Kenneth Gudbranson, Invacare Corporation - Senior VP, CFO & Treasurer [40]

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Thank you, Jim. I feel the same way.

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James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [41]

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In terms of the quarter, was there any impact from the hurricanes in the quarter or to your facility in Florida?

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Matthew E. Monaghan, Invacare Corporation - Chairman of the Board, CEO and President [42]

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No, I wouldn't say in any material fashion. Unfortunately it's an opportunity for us to step in and help people who lost equipment or needs and things like that, but I'd say no, nothing material.

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James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [43]

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Then on the balance sheet, goodwill has been roughly $360 million since 2016 or so. It jumps up to $400 million this quarter after it jumped up last quarter. Is there something going on there?

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Robert Kenneth Gudbranson, Invacare Corporation - Senior VP, CFO & Treasurer [44]

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Jim, good question. It's just related to currency. So as we've had strengthening currencies overseas, Europe is primarily where we have goodwill, that goes up on the balance sheet. But it's not anything other than movement of FX.

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James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [45]

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Okay. And then you talked about you transition in Europe to the more clinically complex products, similar to what you did here -- what you've been doing here in the U.S. How long do you think that will take?

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Matthew E. Monaghan, Invacare Corporation - Chairman of the Board, CEO and President [46]

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Good question. We're going to -- it's different in different markets. In some markets, we are in the marketplace amid annual or multi-year tenders so that will stretch it out over a longer period of time. Some markets are like the U.S., daily sales and monthly opportunities. And it's voluntary and it's much, much milder than what we did in North America. But I think we'll continue to see this transformation probably for 3 or 4 years on a very slight basis, but that doesn't mean that the topline will be suppressed for that long. Just we're looking for that level of margin improvement over that period of time as we make those differences. I think the emphasis on topline softness, a little above or a little below constant currency, zero line for a few quarters is probably realistic and then longer term to keep the margin moving forward.

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Operator [47]

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(Operator Instructions)

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Matthew E. Monaghan, Invacare Corporation - Chairman of the Board, CEO and President [48]

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Thank you, Alan. Thank you to all the participants today for your time and attention on the call. We've got a lot of positives to build on as we complete 2017 and we're committed to doing that. Rob, Lara and I will be available for follow-up questions today. Have a good day. Thank you.

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Operator [49]

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And ladies and gentlemen, that does conclude today's conference. We'd like to thank everyone for their participation. You may now disconnect.