U.S. Markets open in 7 hrs 7 mins

Edited Transcript of IVC earnings conference call or presentation 7-May-19 12:30pm GMT

Q1 2019 Invacare Corp Earnings Call

ELYRIA May 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Invacare Corp earnings conference call or presentation Tuesday, May 7, 2019 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* 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

================================================================================

Conference Call Participants

================================================================================

* Christopher Cook Cooley

Stephens Inc., Research Division - MD

* James Philip Sidoti

Sidoti & Company, LLC - Research Analyst

* 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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Invacare First Quarter 2019 Conference Call Webcast. After the management overview, we will open the call to questions. (Operator Instructions) This conference is being recorded, Tuesday, May 7, 2019.

I will turn the call over to Lois Lee, Invacare's Director of Treasury and Investor Relations.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Len. 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 first quarter 2019 financial results and providing investors with an update on our transformation. To help investors follow along, we have created slides to accompany this webcast. For those dialing in, you can find a link to our webcast slide presentations that we will refer to during today's call 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 statements included on the second page of our webcast slides and in our first 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.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Lois. Good morning. We started 2019 with a focus on growing the business and delivering improved financial results.

On Slide 4, I am pleased to share with you some key performance metrics that illustrate our first quarter accomplishments. Excluding respiratory products, where we expected softness as a result of changes to National Competitive Bidding impacted by the expansion of bid areas to other providers, constant currency net sales grew 3% compared to the same period last year.

At same time operating loss improved 13% primarily attributable to cost reduction efforts including a significant reduction in SG&A. Our track record and past success give us confidence we will be able to further optimize and streamline our cost structure as we continue to grow profitable sales and regain market share.

Free cash flow usage, which we previously guided would be similar to first quarter 2018, was favorable by $2.3 million or almost 9% due to reduced operating loss and lower capital expenditures. These actions and others led to an improvement in adjusted EBITDA of $400,000, or 36.5%, in spite of the anticipated declines in sales of respiratory products.

Overall, while we recognize we have plenty of work ahead and need to deliver progressively stronger results, we’re encouraged by improved performance and believe our plan is progressing towards our 2020 goals.

Turning to Slide 5, our enhanced transformation growth plans. We continue to invest specifically in core areas in each geography that will drive the required financial results, market share gains and optimize the use of capital. This is especially true in North America. In Europe, we achieved constant currency net sales growth consistent with our guidance, driven by strong performance in mobility and seating. We have an extensive pipeline of new products such as the recently launched Stand Assist patient lift, [soft cloud mattress and bed] in the lifestyles product category.

In addition, over the next few months, we will have significant new products introductions in mobility and seating, which will accelerate profitable sales growth in 2019 and beyond. We also expect growth margin expansion as the European manual wheelchair production transfers will become operationalized as well as realizing the benefit of cost reduction actions taken in late 2018.

In North America, our primary focus is to return the segment to profitability through sales growth, gross margin expansion and cost reduction. We're taking deliberate actions to achieve these goals and are well positioned to accelerate the business moving forward based on an extensive pipeline of new products introduction, good relationships with key customers and continued investments in sales channels and infrastructure.

Over the past few months, we launched a heavy-duty TDX SP2 power wheelchair that's a great bariatric wheelchair solution, which will expand the range of people we can serve. We expect sales of mobility and seating products to grow at a low double-digit rate over the remainder of the year driven by typical seasonality and new product introductions.

In addition, near-term investments in systems technology are expected to drive efficiencies, lower costs and improve customer experience. The business we do in Asia Pacific region has good potential to expand beyond our core in Australia and New Zealand to Southeast Asia. The near-term focus in the region go beyond building infrastructure that results in a more efficient, lower-cost distribution network with access to other regional markets. Finally, across all our businesses, we're taking actions that will reduce working capital and improve free cash flow.

Turning to Slide 6. As you recall in the third and fourth quarter 2018, we faced 2 external headwinds that impacted North America, U.S. tariffs and changes in CMS National Competitive Bidding program. We had previously guided that the full year unmitigated impact of tariffs will be between $5 million and $7 million based on then-current tariff rate.

During the fourth quarter, we took actions that successfully mitigated approximately $5 million of these costs with additional supply chain actions still in process. In first quarter 2019, the negative impact of tariffs and related material cost increases were approximately $400,000, and we continue to identify opportunities to offset these costs.

Over the weekend, there was discussion about possible increases in tariffs from the current 10% rate to 25% and potentially more tariffs on another $300 billion or more of goods from China. Based on our success in quickly mitigating the previous round of tariffs, we are confident we can take actions to mitigate the impact of a substantial portion of future changes as they occur.

As discussed last quarter, we anticipated the temporary but significant declines in sales of respiratory products and, to a lesser extent, lifestyles products as a result of changes in National Competitive Bidding that went into effect on January 1st. As expected, providers slowed purchases as they continue to assess the impact of this change on their business. In the interim, we have minimized production as we sell through the inventory on hand until buying patterns normalize, and we have focused on some of the more valuable differentiated products within the portfolio.

There had been no further updates on the next round of competitive bidding that goes into effect in 2021, but we do not anticipate any significant changes that would negatively impact our business.

Turning to Slide 7, you can see the milestones of what we've accomplished so far and our plans for 2019 and beyond. In 2018, we returned the company to positive adjusted EBITDA by taking actions to optimize sales, mitigate external headwinds and continue cost reductions. While this story was in line with expectations, we understand that to achieve our long-term goal we need to accelerate growth and continue driving enhanced profitability. That said, we're encouraged by our progress to date.

Going forward, we anticipate improvement in our key metrics compared to the prior year and progress towards both our short- and long-term goals. With this foundation, 2019 will be an inflection point in the company's turnaround. As a result, we remain committed to achieving our near-term adjusted EBITDA target of at least $20 million by the end of 2019 as well as our long-term goal of $85 million to $105 million in adjusted run rate EBITDA by year-end 2020.

I'll now turn the call over to Kathy Leneghan to discuss the performance of the segments and additional financial results for the first quarter.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Matt. Before we get into the numbers, I wanted to highlight a few changes in our segment reporting beginning in the first quarter 2019. As a result of the company's continued transformation, we have revised our segment reporting to more accurately reflect how the businesses are managed and how performance is assessed. As a result, the former North America HME and IPG segments are being unified into a single operating segment called North America. Additionally, the former Asia Pacific segment is now being reported as part All Other as the Asia Pacific businesses individually and collectively do not meet the SEC requirements to be disclosed as a reportable segment. Segment results for 2018 have been revised to be comparable to 2019.

Turning to Slide 9. Reported net sales decreased 5.8% and constant currency net sales decreased 1.4% as growth in mobility and seating and lifestyle products was more than offset by expected declines in respiratory products. Excluding respiratory products, constant currency net sales grew 3% on a consolidated basis.

Sales margin as a percentage of net sales decreased 60 basis points to 27.5% driven by unfavorable sales mix in Europe, foreign exchange, primarily offset by increased gross margin in North America.

Constant currency SG&A improved by $3.7 million or 5.2% driven by cost reductions implemented in 2018. Operating loss improved by $700,000 to $4.5 million primarily related to reduced SG&A expense, partially offset by lower gross profit.

GAAP loss per share was $0.42 as compared to $0.43 last year, and adjusted net loss per share was $0.32 as compared to $0.35. Free cash flow usage improved $2.3 million to a usage of $24.4 million. Adjusted EBITDA improved by $400,000 to $1.5 million. Both free cash flow and adjusted EBITDA reflect a benefit of lower operating loss.

Turning to Slide 10. During the first quarter, reported net sales in Europe decreased 4.9% compared to the same period last year. Constant currency net sales increased 1.9% driven by a 5.6% increase in mobility and seating products and a 2% increase in lifestyle products.

Operating income decreased $800,000 principally due to unfavorable foreign exchange and unfavorable sales mix, partially offset by lower SG&A expenses, which reflect the benefit of the reduction in forced actions taken in late 2018. The unfavorable impact from foreign currency translations was $700,000.

Moving to Slide 11. As previously discussed, sales in North America reflects a combination of the former North America HME and IPG segments, with IPG sales being recorded primarily in lifestyle and a small portion in respiratory.

North America constant currency net sales decreased 8.5% year-over-year, significantly impacted by reduced respiratory sales of $7.7 million or close to 35%, which we anticipated as a result of CMS changes.

Gross margin increased 120 basis points despite the negative impact of tariffs and related material costs increases of approximately $400,000. Operating loss improved by $2.1 million or 33% due to improved gross margins and reduced SG&A expenses, both the result of cost reductions.

Turning to Slide 12. Sales in the all other segment are comprised entirely of the Asia Pacific region. Constant currency net sales increased 19.9% year-over-year, driven by increased sales in all product categories with particular strength in mobility and seating. Operating loss related to the all other segment includes Asia Pacific operating profit offset by unallocated corporate SG&A and intersegment eliminations.

The increase in the operating loss of $400,000 was driven by higher warranty costs in Asia Pacific.

Moving to Slide 13. Free cash flow usage improved $2.3 million to $24.4 million and in line with previous guidance, primarily related to reduced operating loss and lower capital expenditures. While inventory purchases were significantly less than the first quarter 2019 as compared to the first quarter 2018. This was offset by lower accounts payable. For the full year 2019, we continue to expect free cash flow usage of less than $25 million.

Total debt of $300 million excludes operating lease obligations of approximately $24 million that were capitalized on the balance sheet as a result of the adoption of the new lease accounting standard effective January 1, 2019. The company continues to have full borrowing capacity available under its credit facility.

The company believes that a return to positive adjusted EBITDA, driven by operational performance and its balance sheet will support the company's transformation plans and enable the company to address future debt maturities.

On Slide 15, we continue to make progress towards meeting our full year 2019 goals. We expect adjusted EBITDA to accelerate in the second half of the year due to typical seasonality of sales, the completion of the European production transfers, supply chain initiatives to expand gross margin, and realizing the benefit of cost reduction actions taken in late 2018. As a result, we continue to expect adjusted EBITDA of at least $20 million in 2019.

First quarter free cash flow usage was in line with guidance and improved compared to last year. We expect sequential quarterly improvement during 2019 as we reduce operating loss and manage working capital, including significant reductions in inventory levels, while following typical seasonality. For the full year, we expect free cash flow usage to be less than $25 million. Based on our line of sight regarding continued improvement and transformation initiatives and the trends we are seeing, we are progressing towards our 2019 goals.

I will now turn the call back over to Matt.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Kathy. We appreciate the continued support of our shareholders and our associates through this process with a solid start to the year, with a long-term strategy to rebuild this business, deliver shareholder value and be a sustainable leader in the markets we serve.

Thank you for taking the time for the -- on the call this morning. And I will take any questions. Len?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And we'll take our first question from Bob Labick with CJS Securities.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I wanted to start with the two things you need to do most obvious in your chart to getting to your goals are reducing SG&A, which you've done a great job demonstrating already in Q1, and then growing seating and mobility. And you mentioned, I believe, you expect that to accelerate in -- starting in Q2 maybe the back half of the year. Can you talk a little bit more about, the competitive dynamic in mobility and seating particularly in North America and what you see ahead to give you confidence you can return that area to growth after a generally flat Q1?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

On mobility and seating, I think it's a combination of two or three things. One is continued time in market with the products we have and good customer relationships. But I think there are some really good processes that our customers are developing to select the products that they choose to take through their offering and that normally gets worked out in the first quarter. And then I think with those products on formulary, the balance of the year continues to grow on that platform. So we can demonstrate our alignment to those customers who are seeking really great things for their end-user customers. And we can deliver differentiated solutions through our products. So that's good for us to be in those good strong relationships, and then the time and market to actually go sell into their affiliate offices to make that work. That's a big part of it.

And then the second part is just this product pipeline that we have, which we have been bringing into the global marketplace in mobility and seating, starting with the world's first connected chair, that helps with remote diagnostics, the line extensions of that, other things in the active manual space that make manual wheelchairs act like powered wheelchairs. And then beyond that, a whole new line of products that will be coming out over the foreseeable future that will keep that portfolio really vital. Interesting for our customers to consider, interesting for their end-user patients to get in to using and a good gross margin for us to grow. So I think that’s -- those are the ingredients of the crescendo that we'll see from now through 2019 and again in 2020.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

And then as it relates to the SG&A, as I mentioned, excellent progress in Q1. Can you talk a little bit about what you've been doing internally, any new hires, things like that, and what -- behind the scenes you need to do to be able to achieve your goal of, I think, $25 million in savings in North America, where you stand what the kind of roadmap is there?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

There are sort of the normal sorts of optimizing processes that we expect to continue doing that will result in lower costs. But really importantly, over the next 18 months there will be some infrastructure investments that fit within our normal CapEx and operating expense budget that will allow us to be easier to do business with and more cost effective as an operating business, things in phone system and IT technology that allow customer self service and many of the conveniences that all of us probably enjoy as consumers, which we're lagging behind as a medical industrial enterprise. So those will be the big enablers that allow us to bring together the various subsidiaries of our company and be really simple to do business with globally, lower costs, better customer delight, we expect some share gains as a result of that and the ability to improve SG&A.

--------------------------------------------------------------------------------

Kathleen P. Leneghan, Invacare Corporation - Senior VP & CFO [6]

--------------------------------------------------------------------------------

And the benefit of that it's really going to be late '19 but really into 2020, right?

--------------------------------------------------------------------------------

Robert James Labick, CJS Securities, Inc. - President & Director of Research [7]

--------------------------------------------------------------------------------

Okay. Great. And then lastly, I think you mentioned some new products in Europe as well. Is there any sense of the, I guess, ramp or when those should come on. And obviously, you have the FX headwinds, but absent that, I think you have shown some strong growth there. How should we think about that going forward?

--------------------------------------------------------------------------------

Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [8]

--------------------------------------------------------------------------------

Europe has some pretty strong seasonality. Generally, the first quarter is not a strong quarter in terms of growth over prior third quarters that's typically very strong. Fourth quarter is probably our second strongest, and then second quarter is -- maybe ranks third. And those are the combination of government budget, seasonality with Northern Hemisphere weather patterns that drive purchases of mobility and seating products and the purchasing of respiratory products ahead of the winter flu season. Those all stack up to give us that very predictable quarterly season pattern.

We have a really strong portfolio of products that have been coming out in Europe and will continue to accelerate. What we haven't talked about on the call before probably is our work over the last 3.5 years to concentrate our engineering and product development teams into centers of excellence who, by now, are doing a great job getting up products on time with the features and benefits that are desired in the marketplace, at target costs that drive financial return that allows reinvestment. And so from this point forward, we will have a very consistent cadence of product launches in Europe in all segments: products in mobility and seating, power and manual and in lifestyle especially. So that's -- that'll help drive growth in Europe. I think a lot of those products then will flow from Europe elsewhere in the world.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

And we'll take our next question from Matthew Mishan with KeyBanc.

--------------------------------------------------------------------------------

Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [10]

--------------------------------------------------------------------------------

Great. Last call you discussed taking a look at your business segments and pretty much all your products across the board and on a go-forward basis. Now where are you at with the process? What kind of decisions have you started to make?

--------------------------------------------------------------------------------

Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [11]

--------------------------------------------------------------------------------

Yes, a good question and a good recollection. So we wanted to make sure that we had a long-term robust plan after third quarter tariff impact to make sure that we could still deliver the best outcome we could in the time frame 2020. And that caused us to look very critically at the portfolio of products and businesses that we have. And we undertook a lot of effort in fourth quarter and in the first quarter internally and with the help of some consultants to make sure that we are looking at everything in the right way, not blind to anything that we hadn't evaluated before for improvement. Our objective is to make sure that anything we go forward with can be market leading, market share gaining and acceptable profit level. Our general math, which we've been discussing for a long time, is on average if we get a 35% contribution margin and a 25% SG&A margin, that leaves us a 10% EBIT spread, which would work for us. Some products are higher. Some products are lower, but that's sort of the rough math.

What we did beginning in fourth quarter and even more actions in first quarter, which have focused more on the products that drive that kind of margin to simplify how we are selling, so that our selling costs are in line with that math. And we will continue to work this year especially on the G&A part of that again with the infrastructure investments that I mentioned to the last question, which will allow us to get the 35%, 25%, 10% math to work out.

We like the segments that we have with the portfolio narrowing that we've done. And we will always continue to look at the right investments that make that equation work. They have to have the ability to lead in share. They have to have an ability to get the right contribution margin. And the cost of bringing those to market between selling and G&A can't get in the way of that 10% EBITDA spread. So I think we feel pretty confident about what we've done to make that happen. And we'll start seeing that materializing even more through 2019 and into the first quarter of 2020 by the time we get all the infrastructure things done so that we’re easy to do business with and very cost effective as we'd like.

--------------------------------------------------------------------------------

Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [12]

--------------------------------------------------------------------------------

And then just a follow up on the question around the acceleration in mobility and seating through the course of the year. My sense is that you guys annualized a contract win this past quarter and you've kind of seen, as that contract progressed, you saw some good growth and then you saw a little bit of a deceleration, especially going into this quarter. But you do have a backlog, and there is 90- to 120-day lead time with this business. What is the backlog, say, right now that would give us confidence that you can accelerate this business to low double digits in -- through the course of the year? And have you been awarded any new contracts from 1 of your big 3 customers or been added to a formulary?

--------------------------------------------------------------------------------

Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [13]

--------------------------------------------------------------------------------

Yes. Good question. You've been home doing your homework to understand the market very well. So I guess to be -- to agree on kind of the view of 2018, second quarter 2018 was really our big growth quarter, which was really the first quarter we were able to do open business post-consent decree. Consent decree got resolved in July of 2017. We had new products in August of '17 that got CMS approval in October '17, which was evaluated for adoption by customers November to January. And it seems at the beginning of 2018, by the time those decisions were made and our customers feel things were notified, the real effect came in the second quarter 2018.

So we're heading into a quarter now, which we obviously haven't reported yet -- but looks back on a big growth year in the prior year. And I think that pattern of first quarter selection, second, third, fourth quarter fell through, it's probably going to persist as customers look at their annual purchasing volumes, rebates that they get with their various suppliers, and then they look to make changes in their formulary at the beginning of the year. So I think we're going to come out of the suppressed consent decree kind of selling, and we're going to be more exposed now to something that's like an emerging form of seasonality in the North America seat and mobility market. I feel really good about our relationships with all our key customers. We are absolutely focused on making them successful by giving them differentiated values and respective to their customers and what they need to do to win and grow their businesses. And because of the portfolio or the technology we have and put in our products, we can do some unique things that our competitors can't do.

We have very good competitors, so a bit of competition, but I feel good about that. And I think as we look into the [core bank] and the [order bank] going forward, we do see the seasonality emerging that leads us to believe we're on the right path with the growth objectives we have.

--------------------------------------------------------------------------------

Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [14]

--------------------------------------------------------------------------------

Okay. And then last question, then I'm going to jump out. You'd previously given a run rate at Taylor Street. I think it bottomed out somewhere around like $10 million a quarter. Can you just give us a sense of kind of where you're at now on Taylor Street over like -- maybe on an average like trailing 4 quarters and if there's still that fixed overhead absorption that you have to get past as you kind of increase sales there.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Good question. So for a long time during the consent decree, we recorded that the annual sales output of Taylor Street, which was the consent decree facility into the U.S. market, not including what Taylor Street meant abroad. Folks may remember in June of 2015, we launched a really great power wheelchair platform called ROVI, R-O-V-I, which came to our markets from our Motion Concepts branch in Canada and in New York. And that went into the North American market serving some of the same needs that Taylor Street had previously met. We don't report the Taylor Street output anymore, and it's kind of muddled because we would have to add the Taylor Street components and some other business units. So I can only just roughly say that sales is greater than it was when it was just Taylor Street, and the overhead burdens that we have, we continue to optimize. There is a huge physical footprint here in Elyria with the Taylor Street facility. But I think right now, there's very little of it that's fixed an encumbrance or overly burdens current output. Things are either well depreciated or scaled down to the size that we need for our current output. And now really all we do change materials and direct labor as we ramp up. I don't know if Kathy has a different way to open that with that answer.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

No, I think that that's true. The mobility and seating sales that we report in North America are more than just Taylor Street. And so Taylor Street is a component of it. But to your point, there is growth on the ROVI side of the house. There is growth in the custom manual side of the house that we see in mobility and seating there is much more than Taylor Street. And I would say we have capacity at Taylor Street, so there is no additional investments that we would have to make once that volume comes along, we are just managing that overhead structure.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

And we'll take our next question from Chris Cooley with Stephens.

--------------------------------------------------------------------------------

Christopher Cook Cooley, Stephens Inc., Research Division - MD [18]

--------------------------------------------------------------------------------

I guess first for me, if we could -- center in a little bit on North America was very pleased to see the 120 basis point step up in gross margin. I was hoping you could maybe help us parse that a little bit from change in the product mix. And also help us think about cost reduction initiatives in terms of what were the primary contributing factors there to helping you get that step up in growth despite the decline in respiratory, which I realize is a lower margin. And maybe within that same context, could you maybe help us quantify the dollar impact of the rationalization that you undertook during the quarter on the respiratory side? When we think about the canister business, just trying to look at both the top line and also obviously the margin contribution there at the business and then how that transitions forward?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

(inaudible) we are doing such a great job to (inaudible) some of these chairs, which everybody knows came out of the blue after the third quarter and it was great to see gross margin improve so soon after that happened.

Kathy, why don’t you take the first part of that and comment on the respiratory.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So the 120 basis points improvement that you see in margin in North America. Much of it is cost reduction initiatives that were implemented in the first quarter last year, or even into the first quarter of this year. And a good example of that would be on the respiratory side of the house. We had a line of sight that we thought the respiratory business would be down year-over-year, and we guided to that. And so as a result of that, we've shrunk our infrastructure that we had supporting that business. And that enabled us even though respiratory is a lower margin product that give us -- did give us some upside on the margin side of the house because we were able to shrink the infrastructure to be a minimal in infrastructure to support the business that we have on a go-forward basis. With that on the respiratory side of the house as well, our respiratory is a lower margin product, we focus on more of the higher profitability products within that product category. So we focus more on 10-liter concentrators, the HomeFill product versus the highly commoditized 5-liter concentrators. So as well, there would be some product mix in there as well. But it really is more from the cost reduction side of the house and looking at the infrastructure to support that we business -- to support the business that we have and the view going forward.

--------------------------------------------------------------------------------

Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [21]

--------------------------------------------------------------------------------

And I think maybe building on that, the settlement that we took coming out of the third quarter tariffs was really we had to shed any optimism in the plan and really eliminate any costs that would prevent us from getting to the same or similar result despite tariffs potentially going up. But you remember they were talking at the time, and they're talking this last weekend about tariffs going up 2.5%. We feel we just we have to be robust against that. And I think it causes us to focus a little harder on getting costs out which we did pretty swiftly and that's benefiting us now. We also exercised some muscles to demonstrate how we can operate in that kind of regime, which I think will persist for another couple of years and (inaudible) in target.

--------------------------------------------------------------------------------

Christopher Cook Cooley, Stephens Inc., Research Division - MD [22]

--------------------------------------------------------------------------------

I guess just quickly then from me. At this point, you touched on this earlier, but the effort to enhance the cadence of new products across the portfolio not only in Europe but also here in the States. Just kind of curious as you think about going forward, what type of contributions do you -- both from the top line but also from margin perspective, do you think we should start to assume once we get to more of a normalized rate, I'm assuming more in the second half of 2020 and into 2021. And please feel free to correct me if I'm wrong there on the timing, but from that new product, is that something that we should think about, it's just helping you maintain or does that help drive incremental -- not only absolute growth but also margin?

--------------------------------------------------------------------------------

Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [23]

--------------------------------------------------------------------------------

I guess I'd say those go into the overall support of the $12.5 million of incremental contribution in Europe from profitable sales growth, and the $25 million of incremental contribution we expect in North America from profitable sales growth. As we come out with these new products, we are ever more integrated in how we create them internally, and how we deploy them through a supply chain that's incredibly more efficient than we've done in the past, which will also increase gross margin per sale. So we should have more sales because we have new and very interesting products to garner customer interest. And as we sell them, they'll be more efficient in design or on a cost-effective deployment around the world. So I would say those undertook -- why we think we'll get $37.5 million worth of incremental contribution for mobility and seating over the next couple of years.

And I think that’s a remarkable thing for me as we are still able to do it for something less than 1.8% of sales and R&D which for a medical device or an industrial medical device company is remarkably productive. And that goes to, I think, how good our team is at core competencies and developing really interesting products that's good.

But when I look at the portfolio now, we will have interesting products coming out every quarter kind of perpetually. We have -- we've gotten through the bow wave of why we were doing some mobility and seating products. Now we're doing mobility, seating and respiratory and lifestyle products globally all the time. I think it's one of our strongest points. We have good competitors within each category, and I think we have good new products and future products that will help us remain competitive. But then when you put them all together as a composite business, it's really remarkable.

--------------------------------------------------------------------------------

Christopher Cook Cooley, Stephens Inc., Research Division - MD [24]

--------------------------------------------------------------------------------

If I could just squeeze one last one in as well. Just when you look at the capital structure, thoughts obviously on, I guess, the first tranche of the two converts. Is that something that you feel like you'll be in a position to more thoroughly evaluate as you are in the second half of the year or is that something that as you enter 2020, you think you'll have the sufficient run rate both from a cash flow and from margin, to make a better evaluation there after this most recent proxy, you have to also potentially settle in equity, or partially in equity?

--------------------------------------------------------------------------------

Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [25]

--------------------------------------------------------------------------------

Good question Chris. We always feel -- think about our balance sheet to make sure we're using capital appropriately, on a transactional basis for working capital, and then our cash on hand or cash balance for that eventuality of repaying these 2 tranches of debt. Our best tool to facilitate good refinancing is having solid EBITDA, which is the basis of commercial normally commercial lending facilities. And that's why it's so important for us not only to make our commitment to the company's owners and shareholders in delivering EBITDA, but so that we have the commercially reasonable refinancing in terms of (inaudible). So the $20 million EBITDA target, which we are very committed to hitting this year is an important rate point for that, which then leads us to that other target at $85 million to $105 million for next year adjusted EBITDA that should put us in the zone of relatively normal discussions with lenders to refinance that.

On the proxy. Thanks for bringing that up. We -- when we took out the convertible debt instruments because of our market cap and share price at the time, we were constrained to only be able to take those debt issuances being able to settle in cash. And we think it's important for shareholders to allow management to have the flexibility to settle in some combination of shares in cash should those converts be exercisable in the $16 plus range.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

And we will take our next question from Mike Matson with Needham & Co.

--------------------------------------------------------------------------------

Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [27]

--------------------------------------------------------------------------------

I guess, I just wanted to start with the respiratory business. So, in the slide you said that you're going to reevaluate all businesses for market leadership and profitability, doesn't seem like you're going to get to either those in the respiratory business. So why wouldn't you just exit that business completely?

--------------------------------------------------------------------------------

Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [28]

--------------------------------------------------------------------------------

That’s a good question. We want to make sure that our business leaders internally that oversee these various segments and product portfolios are asking that. So I think as Kathy mentioned -- as we answered to a previous question, we are definitely shifting our focus and our internal portfolio to make sure we continue to have a solid offering in the 5-liter category, which is the mainstay of our customers. I think there are a lot of dynamic things going on in the battery-powered portable segment and we continue to have leading features and functionality in our products. And then in the middle is the 10-liter the HomeFill which continue to have enhancement opportunities. So I think if our shareholders can see the results of a 35% nominal contribution margin and then low enough SG&A to get this 10% spread. That's a pretty good use for capital now.

We always look at how to optimize our use of capital. I think right now that is our best plan going forward. We have taken a really critical look at that business during the reimbursement dynamics that have caused for us the sales downturn, and it's enabled us to look at it differently in ways that will drive longer-term profit out of those products. We continue to submit [5, 10 cans] for enhancements to those products. And we think we have good alignment with customers on what they want in a product that serves their customers well. So we should be able to grow those.

It is a challenging market in total, but there are some real product categories in there that we know is uniquely well, where I think we can still be a leader. And if we can generate that kind of EBITDA, then that's good returns for shareholders as we make our targets for this year, and next year in refinancing. But we'll keep working at it you should hold us accountable to demonstrate that we are leading in share and delivering that kind of contribution.

--------------------------------------------------------------------------------

Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [29]

--------------------------------------------------------------------------------

And then the respiratory business, I mean wasn't it just down significantly in North America, it was down a lot in Europe as well, though it was up in Asia. But I mean how much of this is really because of this reimbursement change where they ended the contracts and opened it up to all comers versus the move to POCs in this market because it seems like there is more going on and then just the reimbursement changes I guess?

--------------------------------------------------------------------------------

Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [30]

--------------------------------------------------------------------------------

I think different companies that we compete with are treating the change in the marketplace differently. We've taken the outlook to maintain good customer relationships as they go through this transformation and we find ways to not keep our facilities full and still increase profit. And you would see that in the results we turned in. It's pretty remarkable to do as well as we've been doing despite a really significant downturn in sales.

So that's caused us to take a lot of smart actions that will benefit us well currently and in the long term. I think what the customers are experiencing now in the marketplace is the need for a better balance in the portfolio. There's been a tremendous amount, I guess, feeding frenzy around battery-powered portable oxygen concentrators, which are great modality. But I think as we get into the -- I don't know if it's exactly the third or fourth year of this (inaudible) deployments. I think providers are realizing that once the warranty ends. These things are pretty expensive ways to deploy ambulatory oxygen for a very fixed reimbursement point of center or reimbursed consumer compared to other modalities like our HomeFill portable oxygen concentrators system, which is roughly the same cost at purchase but will last 3x or 4x as long with very little service cost along the way.

So I think what we're going to see is a settling out in the marketplace with a more reasonable balance of the modalities that [C&E] providers are using to get reimbursement and serve their clients well. And we're really well positioned to have that balance. We have great 5 liter, great 10 liter, we have this unique HomeFill that still has patented technology that makes it different. And we have a really great portable oxygen concentrator that still is meeting in terms of connectivity and features everything.

So when we look the marketplace I think we see a reason to hang with our customers and continue to provide us with portfolio and then internally optimize our costs and we still delivery these good results to shareholders despite…

--------------------------------------------------------------------------------

Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [31]

--------------------------------------------------------------------------------

Okay. And then just one on the tariffs. So let's assume that the tariffs increase to 25% Friday night. Where would you stand with being able to mitigate that from a timing standpoint? I mean I guess you've already mitigated the existing tariffs, so if they're on the same items a lot of that would already be mitigated or would you have to take additional steps? And is there a risk that there is some kind of timing issue that it still hits your second quarter results as you take steps to offset it?

--------------------------------------------------------------------------------

Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [32]

--------------------------------------------------------------------------------

Yes, I think if that happens Friday night maybe by Sunday we'll get past the frustration such as asymmetric foreign economic policy. The actions that we've taken to mitigate the previous tariffs should be in effect as you've said and the gap in what we haven't mitigated which was $400,000 in the quarter, it then go up by something like 2.5x reflecting the 10% to 25% tariff increase.

However, that gap already includes some products like in the steel and aluminum categories that are already at 25% so that gap isn't entirely going to be escalated. So I think if you said $400,000 (inaudible) for the year and you multiply that by 2.5x that's sort of the maximum it could be. But we've (inaudible) take action to reduce that even further.

--------------------------------------------------------------------------------

Kathleen P. Leneghan, Invacare Corporation - Senior VP & CFO [33]

--------------------------------------------------------------------------------

Yes, and while that would be the maximum. To your point, the unmitigated portions primarily relates to many of the products that's already at a 25% rate.

--------------------------------------------------------------------------------

Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [34]

--------------------------------------------------------------------------------

And then just on all other Asia Pacific category, you saw really strong growth there. So I guess first where there any kind of like one off stocking orders in the quarter? And then I guess I am a little surprised to see such strong growth but then see the operating income still down year-over-year?

--------------------------------------------------------------------------------

Kathleen P. Leneghan, Invacare Corporation - Senior VP & CFO [35]

--------------------------------------------------------------------------------

And the growth and the sales side of the house is really an all product category. So nothing unusual of going through there, on the operating loss side of the house there was a discrete charge related to invents or was related to warranties -- excuse me -- that impacted the results. So a one time charge related to warranty and that related to the sales growth that we found in Asia Pac distribution business.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

And we'll take our next question from Jim Sidoti with Sidoti and Company.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So based on the cash flow usage in the quarter and the guidance for the year it seems like you're expecting to be pretty much cash flow neutral for the remainder of the year is that accurate?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

On the quarters 2, 3 and 4 will be zero per year per our guidance that doesn't mean that every quarter will be zero but just on the remainder of the year…

--------------------------------------------------------------------------------

Kathleen P. Leneghan, Invacare Corporation - Senior VP & CFO [39]

--------------------------------------------------------------------------------

Yes, historically Q2 is a usage quarter and then we get better in Q3 and Q4 so we would assume that same seasonality that you would have seen last year as well. But each quarter should be better than the previous quarter.

--------------------------------------------------------------------------------

James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [40]

--------------------------------------------------------------------------------

Okay. And I think on the last call you hoped or indicated that you might see a pick up in respiratory sales in the back half of this year, is that still the case or do you no longer think that will happen?

--------------------------------------------------------------------------------

Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [41]

--------------------------------------------------------------------------------

It's an estimate at this point. We've certainly put a robust plan together that assumes it does not grow externally. So that's good we wanted to underpin our story without a lot of optimism. But it's typical for the market to begin incremental purchases late at August or around Labor Day in the U.S. getting ready for the winter flu season. So we assume there's some chance of acceleration at that point. But we don't need it to get to our plan.

--------------------------------------------------------------------------------

James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [42]

--------------------------------------------------------------------------------

All right and last one from me. If you look at the outlook section of the 10Q you filed last night. You've said in order to achieve the earnings and free cash flow targets you expect low to single-digit sales growth, low single-digit sales growth (inaudible) in 2019 and 2020. Does that mean you expect growth both years or just the combined years?

--------------------------------------------------------------------------------

Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [43]

--------------------------------------------------------------------------------

Both years. We expect sales (inaudible) not be exactly the same every season or every quarter. We do have seasonality in Europe for sure. Gets a little different in North America and then it will (inaudible) for the company. But we expect growth overall both years.

--------------------------------------------------------------------------------

James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [44]

--------------------------------------------------------------------------------

So despite the fact sales declined --

--------------------------------------------------------------------------------

Kathleen P. Leneghan, Invacare Corporation - Senior VP & CFO [45]

--------------------------------------------------------------------------------

On the European side of the house, there is steady sales growth on the European side of the house. We're anticipating sales growth on the mobility and seating side of the house from a North America perceptive. But in 2019 that will be offset by respiratory declines.

--------------------------------------------------------------------------------

James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [46]

--------------------------------------------------------------------------------

Right. So respiratory, I mean it looks like it was about $19 million this quarter. You think that's the bottom or do you think that continues to decline?

--------------------------------------------------------------------------------

Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [47]

--------------------------------------------------------------------------------

We attribute this to this external shift to National Competitive Bidding in the metropolitan areas. And if that's the external impact and there are no other external impacts we should be -- hit the bottom of that looking forward to stabilizing growth, if those markets settle out as things get older and need to be replenished again especially heading into the winter flu season. So I don't think it goes down from here. I think it just -- if you assume the assets were in place to serve those customers nationally in the winter, and if the winter is the peak use of those kind of things then our customers collectively all of our customers and our competitors' customers will have that fleet that can get in through Labor Day let's say at least. And then when more people come newly into the market and the fleet of products are then more aged there will need to be more replenishment. So I think if you look at the macros like that I would say it's probably at the bottom in terms of demand.

--------------------------------------------------------------------------------

Kathleen P. Leneghan, Invacare Corporation - Senior VP & CFO [48]

--------------------------------------------------------------------------------

(inaudible) the decline we saw in the first quarter is consistent with the decline as a percentage that we saw in Q3 as well. And so our plan assumes that that same declines continues for the remainder of 2019.

--------------------------------------------------------------------------------

Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [49]

--------------------------------------------------------------------------------

Yes, we kind of look at it sequentially on a rate basis.

--------------------------------------------------------------------------------

James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [50]

--------------------------------------------------------------------------------

Okay. But the message I think you're trying to give us is that even with the weak sales in respiratory because of the strength in Europe and a pick up in mobility, you think overall sales will be up in the low single digits by the end of the year?

--------------------------------------------------------------------------------

Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [51]

--------------------------------------------------------------------------------

Should be -- everything else grows I think Asia Pac, Europe everything in North America except respiratory and respiratory is sort of this TBD until the market comes back. And then all the pieces should be working together. And in the meantime -- but it will not be an excuse for profitability as you can see moves then to drive gross margin up despite that sales decline.

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

And there are no further questions at this time. I would like to turn the conference back over to Matt Monaghan for any other small closing remarks.

--------------------------------------------------------------------------------

Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [53]

--------------------------------------------------------------------------------

Okay. Thank you, Len. And thanks everybody for the time and attention at this call. Kathy, Lois and I are available for any call or questions. I hope you have a good day. Thank you.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

And this concludes today's conference. Thank you for your participation, you may now disconnect.