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Edited Transcript of IVC earnings conference call or presentation 8-Feb-18 1:30pm GMT

Thomson Reuters StreetEvents

Q4 2017 Invacare Corp Earnings Call

ELYRIA Feb 8, 2018 (Thomson StreetEvents) -- Edited Transcript of Invacare Corp earnings conference call or presentation Thursday, February 8, 2018 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kathleen P. Leneghan

Invacare Corporation - Interim Senior VP & CFO

* Lara L. Mahoney

Invacare Corporation - VP of IR & Corporate Communications

* Matthew E. Monaghan

Invacare Corporation - Chairman of the Board, CEO and President

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Conference Call Participants

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* 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's Conference Call and Webcast for the Fourth Quarter and Full Year Ended December 31, 2017. After the management overview, we will open the call to questions. (Operator Instructions) The conference is being recorded, Thursday, February 8, 2018.

I will now turn the call over to Lara Mahoney, Invacare's Vice President of Investor Relations and Corporate Communications. Please go ahead.

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

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Thank you, Chris. Joining me on today's call from Invacare are Matthew Monaghan, Chairman, President and Chief Executive Officer; and Kathleen Lenegham, Interim Chief Financial Officer.

Today, we will be reviewing our fourth quarter and full year 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 fourth 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.

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. I'd also like to welcome to Kathy Leneghan to the call today. Kathy assumed the responsibilities of Interim Chief Financial Officer at the end of November. Kathy has been with Invacare for 27 years serving in various financial roles in North America and in Europe. Since 2003, she has served as our Vice President and Corporate Controller. She has made Interim CFO transition very smooth over the last couple of months, and I'm pleased to have her on the call today.

Turning to Slide 3, you'll see a reminder of the 3 phases of our transformation program, which should be familiar to those of you who have been following our journey. For those new to the story, I'll cover these briefly.

Since 2015, our company has been undertaking a transformation that is essential to reinvigorating the growth and profitability of our business. In 2015, we made substantial changes to our company's strategy to focus on our stronger technical competencies in clinically complex products. This was the basic crawl-walk-run kind of program.

In Phase I, we defined our strategy and began to reorient our business most notably in North America. Phase II has been focused on realigning our infrastructure with our new business model, while also leveraging the North America commercial shift. And by Phase III, we will transition into a growth phase with measurable progress towards our long-term earnings objectives. Throughout all this, we continue to focus on creating a culture of quality excellence as our #1 priority.

2017 was a tremendous year of progress in our transformation across quality milestones, new product launches and streamlining operations. We'll cover some of these details on Slide 4, where you will see the results from the fourth quarter 2017 relating to key financial indicators of Phase I and Phase II that we referred to during prior presentations.

Briefly, during the early part of the transformation, we expected reduced sales as we shed less accretive products, increased gross margin as a percent of net sales to indicate mix shift, temporarily higher SG&A as we made commercial investments, and negative cash flow in the early phases before gross profit dollars increased, SG&A comes down and cash flow improves. We're starting to see a shift in these results compared to those indicators as we made progress in Phase II of our transformation.

I'll talk about the sequential performance in a moment, but first, we'll cover the year-over-year results. Fourth quarter consolidated constant currency net sales decreased 2.3% for the quarter compared to fourth quarter of 2016. Constant currency net sales increased for the Asia/Pacific segment were more than offset by declines in other segments.

Compared to fourth quarter of 2016, gross profit decreased $0.4 million to $68.3 million. Gross margin as a percent of net sales decreased 60 basis points to 27.3%. During the fourth quarter of 2017, we made decisions that reduced gross margin. For example, we liquidated inventory that we had built up over the years to facilitate smooth transitions during our plant closures and related product transfers. We believe this will put us in a good position going forward.

Constant currency SG&A decreased 5% to $70.8 million in the fourth quarter of 2017, primarily driven by lower product liability expense and reduced employment costs as a result of restructuring actions completed in 2017.

During the fourth quarter of 2017, the company generated $20.6 million of free cash flow compared to a usage of $10.6 million in the fourth quarter of 2016. This significant improvement in free cash flow was driven by our focus on working capital. This was an important objective for the team, and I want to thank the many associates for their efforts to generate these positive results.

EBITDA in the fourth quarter was negative $3.9 million compared to EBITDA of negative $3.2 million in the fourth quarter of 2016. During the quarter, EBITDA was impacted by $3.3 million of restructuring costs and lower net sales, partially offset by reduced SG&A expense. Excluding restructuring costs from both periods, EBITDA improved $1.4 million compared to the fourth quarter of 2016.

While not noted on this slide, I'd I also like to point out that adjusted net loss per share was $0.42 compared to adjusted net loss per share of $0.46 for the fourth quarter of 2016. The improvement in adjusted net loss was driven by reduced SG&A and tax expenses, partially offset by increased restructuring costs and higher interest expense. The company incurred net interest expense of $6.7 million in the fourth quarter of 2017 compared to $4.6 million in the fourth quarter of 2016. The net increase was primarily due to the company's 2017 convertible debt issuance.

We're also measuring constant currency sequential net sales, which we believe gives a more timely financial measure for evaluating our core operating performance as we work through our transformation.

On Slide 5, you can see the sequential comparison of reported net sales as we've moved through the transformation. You can see the flattening of the sales decline that has been largely the result of intended sales reduction of less accretive products.

Sequentially, Europe continue to perform well. Importantly, constant currency sequential net sales for North America/HME and IPG were largely flat. We'd expected the potential for sequential growth in North America/HME, and we're pleased to have sequential sales growth in our focus areas of mobility and seating and respiratory products. This growth was offset by sequential declines in lifestyle products.

During the quarter, Asia/Pacific continued to have steady performance. On a consolidated basis, constant currency sequential net sales decreased 1.2% compared to the third quarter of 2017. In light of the significance of our transformation, we're pleased with the stability in our sequential net sales compared to the third quarter of 2017.

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 quarters since the transition started in 2015. You will see this on Slide 6 of the presentation. This is our "Say-Do" Ratio page. On this page, we see the sequential year-over-year trends. Here we see the fourth quarter net sales decreased, as we discussed, but the year-over-year decline is getting smaller. Sequentially, North America/HME net sales were flat with the third quarter. We expect continued progress.

For gross margin as a percent of net sales, we're looking for improvement from mix shift. During the fourth quarter, we made the decision to liquidate the surplus of inventory built in part to support our 2017 footprint changes. As a result, the gross margin percentage decreased slightly.

Gross profit dollars are beginning to stabilize as we build back the business. The constant currency SG&A improved in the quarter as a result of lower expenses, including the benefit of restructuring actions completed in 2017 and favorable product liability expense. In free cash flow, the significant improvement in the fourth quarter was the generation of $20.6 million. This result was sequentially favorable by $25.3 million and by $31.1 million compared to fourth quarter of 2016.

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

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

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Thank you, Matt. Turning to Slide 7, all comparisons are with respect to the same quarter last year unless otherwise noted.

For the fourth quarter of 2017, European constant currency net sales decreased 5.1%. This slight decline was driven primarily by respiratory products, partially offset by increases in mobility and seating products. Operating income decreased $0.6 million compared to the fourth quarter of 2016. The decrease in operating income was driven by unfavorable manufacturing variances, including one-time cost related to the company's decision to move certain production from Sweden to France, and increased freight and warranty expenses. These factors were partially offset by favorable net sales mix.

For the fourth quarter, North America/HME constant currency net sales decreased 7.3% with decreases in all categories. Excluding consumer power products that were discontinued in the fourth quarter of 2016, mobility and seating sales increased by 5.4% compared to the fourth quarter of 2016. Importantly, sequential net sales were flat with the third quarter of 2017 as growth in mobility and seating and respiratory products was offset by declines in lifestyle products.

Operating loss improved by $5.2 million compared to the fourth quarter of 2016 primarily related to lower SG&A and research and development expenses as well as favorable manufacturing variances, partially offset by year-end promotional efforts. The SG&A decline was driven by reduced product liability expense and employment costs.

Constant currency net sales in the IPG segment decreased 6.3% driven by declines primarily in bed products. Despite the sales decline, operating income increased slightly due to the reduced SG&A expense and favorable net sales mix.

For the fourth quarter of 2017, Asia/Pacific constant currency net sales increased 13.9%. Net sales increased in all product categories compared to the fourth quarter of 2016 principally related to mobility and seating products. Operating income was down slightly as a result of unfavorable net sales mix offset by reduced research and development expenses.

Moving on to Slide 8. Total debt outstanding as of December 31, 2017, was $301.4 million, which consisted of $270 million of convertible debt and $31.4 million of other debt, principally capital lease liability. The company has 0 drawn on its revolving credit facility with availability of $39.9 million as of December 31, 2017.

The company's cash balances were $176.5 million as of December 31, 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 2017, which was partially offset by cash used by operations throughout the year and a legacy debt repayment in the first quarter of 2017.

The company's cash conversion days at December 31, 2017 were 67.1 days as compared to 81.9 days at September 30, 2017 and 63.6 days at December 31, 2016. The reduction in cash conversion days in the fourth quarter benefited from reduced inventory levels and increased accounts payable. The increase in cash conversion days in 2016 is primarily attributable to increased accounts receivable.

As a result of the new U.S. tax reform legislation, the company recorded in the fourth quarter a non-cash tax benefit of $1.6 million related to the reevaluation of net deferred tax liability. The company provisionally does not expect to have a deemed repatriation transition tax liability and we estimate that our U.S. federal tax loss carryforward is in excess of $280 million at December 31, 2017.

I'll now turn the call back over to Matt, and then we can address questions.

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

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Thanks, Kathy. On Slide 9, we highlight the important themes of our Phase II transformation. In 2017, we made tremendous progress towards restoring the company's long-term earnings potential.

First, we continued to make progress in our quality systems and cultural quality excellence. Following 5 years of quality systems remediation, the company successfully satisfied FDA requirements under the consent decree to resume full operations at our corporate and Taylor Street manufacturing facility in Elyria, Ohio. This allows us to sell custom power wheelchairs without restrictions from our Taylor Street manufacturing facility. Since this restriction was lifted on July 24, 2017, we've been actively refamiliarizing our customers with our Invacare TDX line power wheelchair.

We have seen mobility and seating sales growth as a result of these efforts and from the continued performance of our rehab sales force across the category. On January 3, 2018, FDA notified us that Alber's responses to the September 2017 warning letter were adequate and removed import suspension of Alber products. FDA is expected to conduct a follow-up inspection of Alber's facility in Germany later this year. We're pleased with this progress.

Second, we launched over 10 clinical products in 2017, including a new Invacare TDX SP2 power wheelchair with LiNX technology and the Invacare Platinum Mobile Oxygen Concentrator with Connectivity. These 2 notable products demonstrate the company's unique strength in informatics that feature great benefits for both consumers and providers. We look forward to expanding use of informatics across our business.

Third, we've been focused on the commercial output of our investments in North American sales force. After several quarters of transformational work, North America/HME achieved constant currency sequential net sales growth in the third quarter of 2017 compared to the second quarter of 2017, which is largely the result of new product offerings and increased commercial effectiveness. And as we previously described, there's a long sales selling cycle in North America custom mobility and seating products, and we do not expect immediate V-shape sales recovery. Nonetheless, we're pleased to see North America/HME sales remain at this pace in the fourth quarter of 2017.

Also in 2017, we started to gradually apply the transformation to the Europe segment, which slightly reduced the segment's net sales as it begins to shift its product mix towards more clinically valued higher-margin products. Many countries in Europe continue to value the durable lifestyle products that we make, and we will continue to support those. Strategically we want to align our global resources and efforts towards our more clinically complex and valuable portfolio.

And finally, as a critical part of our transformation is to streamline operations, drive efficiencies and reshape the organization around our new business model. In 2017, we announced approximately $23.4 million in expected annualized cost savings, including savings from fewer facilities. While these decisions are never easy, we're pleased with the smooth transition of operations during this period.

2017 was an undeniably strong year of progress in our transformation. We demonstrated our ability to change what's necessary to build long-term shareholder value. Importantly, we're only midway through our transformation. We have a lot of work yet to do. We acknowledge that market share gains take time. We're pleased with the early results of our commercial investments and enhanced product portfolio.

We will continue to expand our balance sheet to invest in working capital as we grow, and we still have a number of investments to make to restructure the business for cost and efficiency. We appreciate the support of our shareholders, associates and customers through this process. We have a long-term strategy to rebuild this business to be a sustainable leader in the markets we serve.

I want to thank you for taking the time to be on the call this morning. I think now we have time for questions. Chris?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll go first to Bob Labick at CJS Security.

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

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So I wanted to start with the new products. Really exciting the TDX SP2 and then the Platinum Mobile. Can you give us -- I know that it's early still for each, can you give us some of the initial feedback from the field? What have you learned from selling them? And how are they being received and start there?

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

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Sure. Thanks for the question. So TDX SP2 is our new custom power wheelchair with LiNX control technology, which provides wireless programmability and informatics that are useful for users and providers. That's been very well received. I think we hit the mark in bringing value to information. It's a very popular subject, talking about data and data in health care. But ultimately, it's only valuable if it provides real value for the end-users. And we've had that the feedback with SP2. It's easy to program, great clinical setting workhorse, the end users like the availability of that information and it's our target to make providers be the best they can be, more cost-effectively and easily with our products. So I think we hit it there. We launched that product in early August. And I think it's important to note that we didn't have codes for CMS reimbursement of that new product until late September, and given the 90-day quote-to-order cycle, we're still in early innings of sales uptick for that product. But the feedback has been really great.

And then on Platinum Mobile, we hit the target there too. We've got a great form factor that's competitive and battery-powered portable oxygen concentration. Great output, weak noise, aesthetics are good, good battery life. You can change the batteries without turning the unit off, which is important. And then at the end of October, we launched with informatics, which allow end users and providers to be more comfortable understanding what the unit's doing, have easier access to information. We have very accurate battery life remaining predictions, which reduce the anxiety of end users as they try to figure out how far they can go on their day's journey. And then we're really targeting making providers very effective by lowering their cost to provide great service. And you can do that with our informatics platform and portable oxygen concentrators. So it's really good.

We aren't breaking out sales by these products. And I'm not sure we intend to, but it was really good to see ambulatory, respiratory growth in the fourth quarter.

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

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Yes. Just to add to that, I mean these are the latest 2 products in a cadence of steady new products since 2015. So we're seeing growth in ROVI, our P.R.O. CG tilt-in-space chair that we talked about, prior to this the Alber Twion. And that's where the growth in North America mobility and seating has come from through the fourth quarter so far.

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

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There's [no second punchers] in our seating and mobility portfolio, really great.

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

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And then sticking with the informatics theme. Obviously, I think that's a big step that you're bringing to the industry or industries for the products. Should we expect additional products with informatics? Is it going to be -- just talk about the thoughts behind rollout of adding informatics to more products? And how long that takes and the acceptance? And how do you sell it differently? Is the sales cycle different? Or how that should launch through '18 and beyond?

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

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Good questions. So I think there are really 2 directions to go, and we intend to go on both of those. So that informatics on more devices connecting together in useful ways. But then there is a deeper saturation within the devices we already have to provide even more value. And both of those are important. I think we're uniquely positioned in the industry to be with end users potentially 24 hours a day based on the different devices that we can put into their environment. So that capability allows us to provide more useful 24-hour a day insights into health care data and helps providers be more cost effective in supporting their end users, their customers 24 hours a day.

But then I think as we've seen in all of our consumer lives, there is a tremendous amount of information and utility you get out of generation 2, 3 or 4 of applications that are on devices you already have. So I think we'll see both of those. It's a really strong capability of the company with a number of subsidiaries that have that innate technology available. So we're looking forward to that. But I think we really can't do information for information's sake. We've got to do it for clinical utility and cost performance for our providers. And I think we're striking a balance there.

So you asked about timing. It's not always about how long does it take to make the circuit boards and the software. You'd really have to get to the kernel of what is the value people are going to get out of that information and will it be a compelling commercial event for folks. And I think we're doing that. But as I mentioned, you can go back and look for the last 2.5 years, we had a quite a steady [case chains] of new product introductions. And I think we look forward to something similar in the future, it's very sustainable.

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Robert James Labick, CJS Securities, Inc. - President [8]

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Okay, great. And then maybe last one, and I'll jump back in the queue certainly. But obviously, you had a very good working capital performance in the quarter and some good cash from working capital. Can you just talk a little bit about the expectations through '18 and beyond in terms of the facility rationalization, working capital, cash flows? And where you see that going and how you feel capital-wise right now?

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Matthew E. Monaghan, Invacare Corporation - Chairman of the Board, CEO and President [9]

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Okay. So in the fourth quarter of 2018 (sic) [2017] we had a very good performance on working capital. It's been a focus for us for the whole year. And as we talked about in prior periods, we put a lot of inventory on the balance sheet to allow us to move out of our Suzhou, China facility and put that work into destinations in North America and Europe. And we did it that way so that we didn't have to build redundant capability to facilitate the production of those devices. So as you'd imagine, when you go to plan all those transitions, you want -- if anything you want to have a little bit too much than not enough. So that you don't miss sales during the transition. But when the new site -- the destination site is up and running, you need to quickly burn through that, because once it's ready, you don't want it to be idle and cost -- have the cost of idle operations. So in the fourth quarter we had to do some things to make sure we tied up all that inventory.

So that's an episodic event in working capital. And there will be other episodes where we build inventory and liquidate inventory probably over 2018 and maybe into 2019 as we continue to make some footprint moves. But I think what's important in this year as we showed we can execute both complex transformations and liquidate to a productive outcome at the end.

In 2018 and 2019, I think it's not going to be early innings or it's not going to be too soon before we're wildly cash flow positive on a total basis, because while operations should generally improve over time, we still have investments to make in working capital and CapEx. And although not unpredicted, it will be relatively significant. We've talked about working capital needs for our custom power wheelchair business being roughly 180 days, given the long quote cycle and raw material WIP process we have and then the extended period of time to collect. So the growth in custom seating and mobility will come with a bigger balance sheet over time and then kind of normal CapEx. We still had a relatively low CapEx burn, and as we've historically discussed, that will gradually come up to some moderate level. I don't know Kathy if you have other comments on...

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

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The other thing I would note is that our cash flow historically has been seasonal and we normally use cash on the first 2 quarters of the year and then we generate cash in the last part of the year. And earlier in the year, we have customer bonus payments that we have to make, employee bonus payments we have to make, cash tax payments that we make. So I would anticipate that, that continuing forward would be the same.

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

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A good point.

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Operator [12]

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

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Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [13]

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Matt, could you give us an update on where you're at with the specialized sales forces now? I think you basically went to specialized sales force in the complex rehab, and I think in the long-term care as well?

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Matthew E. Monaghan, Invacare Corporation - Chairman of the Board, CEO and President [14]

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Right. Happy to. So when I came in 2015, there were still several sales forces covering North American territory, and the United States particularly, that were selling subsets of clinical solutions based on the historic acquisition or subsidiaries that they have been part of. And I think, while we had great coverage of customers, we didn't necessarily make it as easy on customers as we could have because we had multiple people calling for the same person solutions. So in 2016, we harmonized the customer teams and put them into 2 big groups: Complex rehab and post-acute care. And then in 2016 we made big investments in recruiting and retaining great talent of that team. We had expected it to take 6 months to 12 months, so let's say on average 9 months for the sales team to become accretive. And the difference in that range is whether we had somebody who is calling on familiar customers in the territory or someone who is completely new to the business and territory, which require more time to build back the business.

So we had expected early 2017 to be that period where we're building up traction. The headcount changes, the personnel shifts and training all occurred and were wrapped up by December 2016. So I think pretty much right on time. By third quarter of 2017, we started to see the growth we had wanted to see in seating and mobility in North America and that's reflected sequentially. And then good to see that stability in the fourth quarter. So I feel good about the post-acute care team -- sorry, the complex rehab care team.

The post-acute care team, that transition started a couple of quarters later. We really didn't get into that until the second and third quarter 2016. We've been working to diversify our customer mix and making sure that we're not only calling to 2-tier distributors who represent our products, but also to have those folks in the clinical settings. And I feel good about it, what I see internally that we don't report externally are robust customer interest and customer appointments and the quote process is healthy. But we're selling in to largely the capital markets -- capital project markets, big renovations and new construction of skilled nursing facilities. And our products are the very last thing to go in them. The carpet has to be done. Wallpapers got to be up and dry before our products come in. So we're at the [whip end] of how those projects shift due to the course of normal disruptions in those projects.

I feel good about the sales force in that area. We have great training. We introduced service solutions like wound care management and safe patient handling which augment the value we bring to customers. We're now very good at working with our skilled nursing facilities' customers to do post-audit reviews of findings there to make sure that they're doing the best that they can in their local markets. It will take a little bit more time though, I think, to see externally the sales results that we expect. But behind-the-scenes I see positive indications that's coming along.

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Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [15]

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Just a follow-up on the post-acute and the IPG segment. Given where you're at today and then given the expectation of where it's going to be when you are nearing that $100 million EBITDA target and IPG being a big part of it, there is a big gap. And it would imply that at some point, maybe in late 2018, you start seeing a pretty big acceleration in that business. I know it's a long cycle. Could you help talk about what the quoting looks like there? The activity that you're seeing? And when you think that may start to turn?

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Matthew E. Monaghan, Invacare Corporation - Chairman of the Board, CEO and President [16]

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Sure. I think when I look at that marketplace, there is great stability in the end markets. The markets are very large and the pressure that those customers are having, I'll use the skilled nursing facility as an example, are as tough as ever in terms of having to demonstrate real clinical performance. Audit scores are published, made publicly and those influence families' decisions on where they put their loved ones for care. So there is great receptivity to the kind of products and services that we offer. And our team is in place I think in the right quantity and the right locations to deliver that. So the question is just, how quickly are we building up that backlog and are rebalancing our sales to 2-tier distributors who often have catalogs or other mechanisms of multi-branded products to switch from and being up in the end market places with the right size of facilities. And those facilities are -- tend to be pretty sophisticated in how they trial products and negotiate products, because they want to have simplicity in their portfolio as they support their teams, typically of many facilities, and make the decor look the same and parts being interchangeable and things like that.

We're in a unique position to be able to support them with architectural design services and project management, we do custom colors in all our wood furnishings so we can match what they need. We've got a mobile showroom that travels around North America. So we can very conveniently show end users what a room with our products might look like. I think we got all the right ingredients, but we've got to get after the selling growth. So I see strong market, strong products, good sales team. We've got to -- we need a little bit more time to see the traction we have to offset shifts in our 2-tier distributors that has happened over time and make that happen.

You're maybe also silently also referring to our plan, which has been out for more than a year in terms of how we're going to get to $100 million of EBITDA, and we talked about custom seating and mobility growth, we talked about post-acute care growth. And way back when we made those original estimates, we didn't have the portable oxygen concentrator and great ambulatory solutions that we have now. So I think there is some upside in terms of how we diversify our plan to get to that $100 million considering what we could do in respiratory that we hadn't previously contemplated. So I still feel like it's a pretty well-diversified plan as we look to grow to that $100 million of EBITDA run rate in the third quarter of 2020.

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Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [17]

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Excellent. And then I just wanted to -- in the press release you referred to sequential increases in respiratory in part driven by I guess promotional activity and the [PSEs] associated with the launch. Can you talk a bit about what that means?

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Matthew E. Monaghan, Invacare Corporation - Chairman of the Board, CEO and President [18]

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Sure. We were really excited to make great products available for this year's winter and flu season, which is a great period to be helping providers have solutions for their patients. So we wanted to make sure we didn't miss that. I think we've talked in the prior year that we had come out with our portable oxygen concentrator a little too late for the purchasing decisions that have been made. And we really had to hustle on to get our informatics platform ready for the launch this year. You can imagine when there are sales persons out trying to talk to customers who already have a product, they say, "Great, I'm not sure I have time for your call, because I already have a product, and I think I'm pretty happy." And we wanted to make sure we were getting in front of all the right customers to really be considered, we have a great solution.

So at the end of the third quarter and at the very beginning of fourth quarter, we were out with a lot of intense marketing efforts to reveal our informatics platform. We gave a little prize to people who showed up early to adopt that in small measures because we wanted to get those trials. And the feedback has been really great. So we're back at less of the promotional activities and really excited about the volume and interest that we're seeing not only from battery-powered, but interestingly the HomeFill adjunct to stationary that gives ambulatory oxygen through tanks is also really good. I mean, ambulatory respiratory products drove the growth in fourth quarter both HomeFill and batteries. So I think we have great solutions for providers that meet their needs, whether an end user wants a battery powered device that has all the stylishness and modernity of those devices and informatics, that's really great. But honestly, the HomeFill devices which compress gas into a small water bottle sized container that are absolutely silent, they are very cost-effective, they're (inaudible) are still a great solution. So glad to have both and glad to see the results in fourth quarter of that growth.

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Operator [19]

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(Operator Instructions) And we will take our next question from Jim Sidoti of Sidoti & Company.

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James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [20]

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You talked about the commercial activity in the quarter. Is there any way to quantify what the impact was on revenue?

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Matthew E. Monaghan, Invacare Corporation - Chairman of the Board, CEO and President [21]

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Commercial activity in terms of revenue? I'm sorry,...

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James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [22]

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(inaudible)

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Matthew E. Monaghan, Invacare Corporation - Chairman of the Board, CEO and President [23]

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Yes, it was a mix of things. So I don't know if we have a really easy way to break it out. We were trying 2 things in respiratory, as I just mentioned. We were wanting to make sure that our respiratory devices were seen at all the right places in time for winter purchasing decision making. And we also had some promotional activity to make sure that our inventory was getting liquidated so we could bring these destination facilities up to productive operation in the fourth quarter. So probably a way to see that would be maybe gross margin percent decline, I would attribute that 60 basis points decline to being the episodic result of those net activities combined.

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Kathleen P. Leneghan, Invacare Corporation - Interim Senior VP & CFO [24]

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But we don't expect that to be kind of an ongoing sort of issue. Really they were more one-time.

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James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [25]

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No, that was going to be my next question. But in terms of revenue, I mean a couple of million -- less than a couple million, is there any way to get a handle on that?

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Kathleen P. Leneghan, Invacare Corporation - Interim Senior VP & CFO [26]

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We don't break that out.

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

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I mean, I guess, we -- yes, we don't break that out. I mean if you're trying to triangulate it a little bit, you can look at the inventory values through the year and figure out on a margin basis if inventory started at one point in the first quarter and ended at a different point in the fourth quarter at whatever margins. You could kind of see this commercial volume of that maybe.

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Kathleen P. Leneghan, Invacare Corporation - Interim Senior VP & CFO [28]

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No, I think the measure is the gross margin.

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

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Yes. A little dent in the gross margin temporarily.

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James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [30]

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Okay. And any sense on how long it will take for some of the products you launched in 2017 to really start to contribute in 2018?

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Matthew E. Monaghan, Invacare Corporation - Chairman of the Board, CEO and President [31]

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Well, I think SP2 we should see some good results in 2018 because now we're getting into that 90-day period after having had CMS codification for reimbursement, and that's an important payer class for people that need an SP2. So we'd expect growth there and we just had a really, really positive feedback. We're on all the formularies where we need to be. So that's interesting. The VA is interested in all our power mobility solutions. So I think 2018 should be interesting in mobility. And then we expect respiratory growth to be solid. We have a full complement of solutions for everybody, especially in the ambulatory side, and 2018 will be good. It's still -- I want to caution people, I think about 2017, we look back and we feel really great about all the change we made. But we're only halfway through Phase II. So a baseball analogy is appropriate, I'd say, we're kind of in the fourth inning and we still have some variability to go through in 2018, which is why it's still a little early for us to give growth guidance on where we'll be through 2018, but at some point we'll get comfortable doing that.

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James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [32]

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Okay. But do you think it will be maybe more of a second half type of thing? You'll see the sales accelerate as we go through the year?

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Matthew E. Monaghan, Invacare Corporation - Chairman of the Board, CEO and President [33]

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I think sales and share gains should progress kind of geometrically. You grow share by keeping some of the share you've built and then you get more share and that expands. So you should generally increase it at higher rate over the long term. But I want to make sure people who are sharp in doing models don't do a straight-line from here to the end because it's going to grow kind of biologically like that.

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Operator [34]

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It appears there are no further questions at this time. I'd like to turn the conference back over to Matt Monaghan for additional or closing remarks.

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

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Okay. Thanks, Chris, and thanks, everybody for dialing in today for your attention and interest in our company and our story. Kathy, Lara and I are available to take follow-up questions today. Hope you have a good day. Thank you,.

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Kathleen P. Leneghan, Invacare Corporation - Interim Senior VP & CFO [36]

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Great. Thank you.

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Lara L. Mahoney, Invacare Corporation - VP of IR & Corporate Communications [37]

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Thank you.

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Operator [38]

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And this does conclude today's presentation. Thank you all for your participation. And you may now disconnect.