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Edited Transcript of IVC earnings conference call or presentation 8-May-18 12:30pm GMT

Q1 2018 Invacare Corp Earnings Call

ELYRIA May 14, 2018 (Thomson StreetEvents) -- Edited Transcript of Invacare Corp earnings conference call or presentation Tuesday, May 8, 2018 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kathleen P. Leneghan

Invacare Corporation - Senior VP & CFO

* Lois Lee

* Matthew E. Monaghan

Invacare Corporation - Chairman, President & CEO

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Conference Call Participants

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* Christopher Cook Cooley

Stephens Inc., Research Division - MD

* 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 2018 First Quarter Conference Call and Webcast. After the management overview, we will open the call for questions. (Operator Instructions) This conference is being recorded, Tuesday, May 8, 2018. And I would like to turn the call over to Lois Lee, Invacare's Director of Treasury and Interim Investor Relations Manager. Please go ahead.

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Lois Lee, [2]

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Thank you, Yolanda. Joining me today on today's call from Invacare are Matthew 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 2018 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 live presentation that we will refer to during today's call at www.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 slide and in our first quarter earnings release. For the 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 notes in the appendix of our webcast slide and in the related reconciliations in the earnings release posted on our website. With that, I now turn the call over to Matt Monaghan.

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

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Thank you, Lois, and good morning. We've made meaningful progress in a number of key areas this quarter and I'm pleased to give an update.

Turning to Slide 3, you'll see a reminder of the 3 phases of our transformation program. Since 2015, our company has been undertaking transformation that is essential to reinvigorating the growth and profitability of our business. In Phase I, we defined our strategy and began to reorient our business, most notably in North America. We're midway through Phase II. Now where we focus on streamlining our infrastructure with our new business model and simplifying our customer interactions, we're also launching new products in our enhanced commerciality. Phase III, we expect to be a growth phase with more measurable progress towards our long-term earnings objectives. Throughout all this, we continue to focus on creating a culture of quality excellence as our number 1 priority and profitable growth underpinning all we do.

Briefly, to summarize the early part of our transformation, we have expected reduced sales as we have shed less accretive products, increased gross margin as a percentage of sales to indicate mix shift, temporarily higher SG&A and negative cash flow, before gross profit dollars increase, SG&A is reduced and cash flow improves.

On Slide 4, you'll see the results of first quarter 2018 compared to the key financial indicators of Phase II that we've referred to in prior presentations. Compared to the first quarter last year reported sales increased 2.3% to $237.1 million, while constant currency net sales decreased 4.4% compared to the same period last year. Importantly, both the North America/HME and IPG segments achieved constant currency sequential net sales growth, an indicator of the progress of our transformation. Gross margin as a percentage of sales was unchanged to 28.1% compared to the first quarter last year, primarily as the result of favorable manufacturing cost, including favorable impact from foreign currency and reduced R&D expenses, offset by increased freight expense. Notably, we realized a sequential improvement in gross margin as a percent of net sales from the fourth quarter 2017 of 80 basis points. Gross margin continues to be an important measure, as we progress in our transformation and continue to shift our sales mix to reflect more clinically complex products. Compared to first quarter last year, gross profit increased $1.4 million to $66.5 million, primarily due to favorable foreign currency and reduced R&D expenses, partially offset by increased rate expense, principally to support the fulfillment of the backorder carried over from fourth quarter of 2017.

Excluding the impact of foreign exchange, SG&A decreased $4.8 million or 6.6%, primarily driven by reduced employment cost. Free cash flow in the first quarter of 2018 was negative $26.7 million. The company's improvement from operating results substantially led to the $6.6 million improvement in free cash flow compared to the first quarter 2017. Historically, the first half of the year has been seasonably more cash consumptive due to seasonal inventory increases, payments of earned customer rebates and employment bonuses that occur in the first half of the year. EBITDA was negative $1 million, an improvement of $6 million compared to negative $7.1 million in the first quarter of 2017. The increase in EBITDA was driven by improvements in the operating results of the business segments, including decreased SG&A expense and reduced restructuring charges. The first quarter of 2018 included an increase of $0.9 million, related to equity compensation expense compared to the first quarter of 2017. Sequentially, EBITDA improved by $2.9 million compared to the fourth quarter of 2017, primarily due to reduced restructuring charges and lower SG&A expense.

The first quarter of 2018, included an increase of $1 million of equity compensation expense compared to the fourth quarter of 2017.

While not noted on the slide, adjusted net loss was $0.35 per share compared with a net loss of $0.47 per share for the first quarter of 2017. The improvement in adjusted net loss per share was driven by reduced restructuring charges and improved operating results in the majority of segments, principally due to favorable gross profit and reduced SG&A expense.

The company incurred net interest expense of $6.7 million in the first quarter of 2018 compared to $4.4 million in the first quarter of 2017. The increase in interest expense was due to the issuance of convertible notes in the second quarter of 2017.

In the second quarter of 2017, we began measuring constant currencies sequential net sales, which we believe gives a more timely financial measure for evaluating our core operating performance as we work through the transformation. This has been especially important in the North America/HME segment, where the transition has been more significant.

On Slide 5, you can see the comparison of sequential recorded sales as we've moved through this transformation. For North America/HME, the first quarter of 2017 was prior to the bottom of our sales decline, which occurred by the end of second quarter of 2017. Sequential net sales increased for both North America/HME and IPG segments for the first quarter of 2018 compared to the fourth quarter of 2017.

For Europe, the sales trend reflects the historically seasonal -- seasonality of the business with a decline in the first quarter after a typically stronger second half of the year. In addition, the decline in the first quarter of 2018 was also impacted by a gradual shift in sales mix to reflect more clinically valued higher-margin products.

As we do each quarter, we want to compare what we've done to what we've said we would do, so we continue to plot our recent quarters with prior quarters since the transition started in 2015. You'll see this on Slide 6. On this page, we show the sequential and year-over-year trends. Here we see that the first quarter constant currency sales decreased notwithstanding the sequential comments just made. Year-over-year sales continue to decline in North America where the transformation is most significant and is compared to a stronger first quarter of 2017, which was also before the bottom of the sales decline. New York sales decline was also impacted by a gradual shift in sales mix to reflect more clinically valued higher-margin products as we acquire transformation strategy to this segment.

Gross margin as a percent of sales was flat year-over-year and gross profit increased $1.4 million compared to the first quarter of 2017, which benefited from foreign exchange. In addition, we achieved an 80 basis points improvement compared to fourth quarter of 2017. As our sales stabilize and gross margin percent improve, we expect gross profit dollars to increase. Constant currency SG&A improved by $4.8 million due to reduced employment cost. And free cash flow, while negative, showed a significant improvement of $6 million compared to the first quarter of 2017 as the result of improved operating results.

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

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

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

For the first quarter of 2018, Europe constant currency net sales decreased 2.6%. The slight decline was driven by lifestyle and respiratory products and to a lesser extent, mobility and seating products as the company gradually applies its transformation strategy to the segment.

Operating income increased by $1.5 million, principally due to favorable impact from foreign currency and sales mix, partially offset by increased freight cost and sales decline. Gross margin as a percentage of sales in gross profit dollars increased compared to the first quarter last year. Again, looking back to the first quarter 2017 before the bottom of the sales decline, North America/HME constant currency net sales decreased 5.7%. The decrease was largely driven by lower sales in respiratory and lifestyle products, offset by increases in mobility and seating products. Sales were also impacted by the closure of the segment Suzhou, China facility in the third quarter of 2017. Sequential constant currency net sales increased by 0.5%, driven by respiratory products, where the difference between the year-over-year and sequential results show a mix shift within this part of the business.

Operating loss improved by $1.3 million, primarily related to reduced SG&A and R&D expense, partially offset by sales decline, unfavorable sales mix and increased freight cost. Gross margin as a percentage of sales and gross profit dollars decreased compared to the first quarter last year. In a similar comparison for the IPG segment, constant currency net sales decreased by 9.3%, principally related to case goods, bed products and interior design projects as the segment continues its customer mix shift within the long-term care channel. Sequential constant currency net sales improved 7.6% driven by interior design and DME products. Operating income declined $0.3 million year-over-year, principally due to a decline in sales, partially offset by reduced SG&A expense. Gross margin as a percentage of sales and gross profit dollars decreased compared to the same period last year.

In the Asia/Pacific segment, constant currency net sales decreased 7.5%, primarily due to reduced sales of institutional beds and respiratory products. Operating income improved significantly by $1.4 million to a positive $1 million compared to the first quarter of 2017 as a result of a favorable sales mix, reduced R&D expenses and manufacturing cost. Gross margin as a percentage of sales and gross profit dollars increased compared to the same period last year.

Turning to Slide 8. Total debt outstanding as of March 31, 2018, was $300.8 million, which comprised of 2 tranches of convertible debt, totaling $270 million and $30.8 million of other debt, principally lease liability. The company has 0 drawn on its revolving credit facilities, with net availability of $35.4 million, as of March 31, 2018.

The company's cash balances were $150.6 million as of March 31, 2018, compared to $176.5 million, as of December 31, 2017. The company's cash balances decreased due to the negative free cash flow, including the timing of significant payments with customer rebates earned from last year sales. As reflected in the cash conversion days, day sales and receivables were approximately 48 days at the end of the first quarter, flat to December 31, 2017. Days in inventory were 69 days at the end of the first quarter as compared to 67 days as of December 31, 2017. I'll now turn the call back over to Matt for additional comments, we can then address questions.

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

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Thank you, Kathy. As you can see on Slide 9, we highlight the essential themes of our Phase II objectives. First, we continue to make progress on our quality systems and culture of quality excellence. In 2017 and into the first quarter of 2018, we have continued making progress towards restoring the company's long-term earnings potential. In January, the company's independent auditor completed its first semiannual inspection of the corporate and Taylor Street facilities in accordance with the company's FDA consent decree. The auditor concluded the company continues to operate these facilities in substantial compliance with FDA requirements.

And in April, FDA conducted a follow-up inspection in the company's Alber facility in Germany, following the corrections of issues raised in the previously disclosed 2017 warning letter. There were no observations from this inspection and Invacare anticipates closure of the warning letter in due course. Sales restrictions from the warning letter was lifted in January 2018.

Second, in 2017, we launched 10 new clinical products, including the new Invacare TDX SP2 powered wheelchair with LiNX technology and the enhanced Invacare Platinum Mobile Oxygen Concentrator with Connectivity. We're excited about the opportunity for informatics platforms to positively impact the daily lives of end-users as well as to assist our providers in reducing their costs and better managing their business.

Third, we continue to invest in and reshape our North American sales force to increase commercial effectiveness. Also, we have gradually begun to apply the transformation to the Europe segment, which may continue to slightly reduce sales as it shifts product mix towards more clinically valued higher-margin products. Overall, we expect slightly higher SG&A spending to support the anticipated sales growth.

Also in Phase II, we're continuing to make progress, reshaping the business for cost and efficiency. In 2017, we announced actions expected to yield $23.4 million in annualized savings. These actions will help us optimize our infrastructure and reduce cost. In January of this year, we announced the transfer of production of manual wheelchairs from our Swiss Küschall facility to an existing facility in France, which is expected to be completed during the third quarter of 2018. This move will enable us to leverage our existing manufacturing capabilities in a logistically efficient location in France. We continue assessing our global footprint for opportunities to be more efficient with lowered cost and simplified ways to conduct business. These benefits will become apparent as we grow sales and leverage these cost improvements.

We're only midway through our transformation, we have a lot of work yet to do. We acknowledge that market share gains take time and we're pleased with the early results of our commercial investments and enhanced product portfolio. We remain confident in the earnings potential of the business and our ability to achieve our strategic goals. We appreciate the continued support of our shareholders and our associates throughout this process. We have a long-term strategic plan to rebuild this business to be a sustainable leader in the markets we serve. With that, we'd like to thank you for taking time to be on the call this morning, we'll open the phone line for questions. Yolanda?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Chris Cooley with Stephens.

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Christopher Cook Cooley, Stephens Inc., Research Division - MD [2]

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I guess, just maybe 2 for me, then I'll hop back in queue. You had good sequential progress in the North American/HME segment, you were down 6.9% in the fourth quarter and then 5.3% here in the 1Q. Just would like to get your perspective on how you see that business, hopefully returning to growth here in the nearer term and then the resulting impact to both gross and operating margin. As we think about that business -- but it's -- clearly you had a strong ISS and we realize there is a fairly long lead time when we think about reentering the powered mobility space, in particular. But help us think about, maybe a little bit of timing on when you expect to see a little bit of a turn there in that segment and then the resulting impact to gross and operating margin? And then I have a follow-up.

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

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Okay, sure. As you know Chris, from having visited ISS, I think our product portfolio looks pretty good competitively. In the complex rehab space, I think we really don't have second-place contenders in terms of products, we've got a good selling team. It was partly through the first quarter when we got an essential customer contract signed and got on people's formulary, and it takes us a little bit of time to get the word out, train, get demo units out in the field. So we see further growth ahead of us. I think we had a decent backlog coming in from the fourth quarter in a number of areas. And I think -- we look forward to this portfolio continuing to accelerate in 2018 and beyond. And the respiratory business, now this is the season where you either have or don't have a winter that affects people's respiratory issues. This was a pretty strong flu season, so we saw a good demand for all the of mix of products; the stationery, the portable and home sales. So we look forward to continued growth in those areas, in general. And it was nice to see sequential improvements in our IPG business. So I think, first quarter -- well, we'd also like to be stronger and things to happen a little bit more quickly with a relatively decent mix of progress based on our commercial team and the portfolio we've renovated over the last couple of years. You talk about gross margin in there, gross margin, we brought in a fair amount of backlog in from the fourth quarter to the first quarter, and unfortunately, spent more than we had planned on freight to expedite the resolution and fill those backorders, so that hurts a little bit, but we did have that 80 basis points sequentially of gross margin improvements. So we consider that mild progress. We look forward to that continuing.

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Christopher Cook Cooley, Stephens Inc., Research Division - MD [4]

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Understood. And this -- the second question in my follow up may be a bit premature, but when I think about just this capital structure here, exited the quarter with about $150 million in cash. And then, net debt position there, I'm just curious how are you -- and $26 million into burn. How are you thinking about the timing of the return to profitability? Which I realize is a function -- a restoration of top line growth. And how, if it all, that may either limit or dictate your future strategic decisions, as we think about the company's infrastructure and portfolio. Really just trying to think about, is this a limiting factor as we try and balance the need for capital to build inventory and a little bit higher working capital right now? Or is there an ability to continue to move fluidly on the portfolio on the infrastructure with the confidence that you will have sufficient cash?

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

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Sure. Good question on capital structure. So we're satisfied with the balance sheet that we have and executing the plans that we expect to be required to complete the transformation. The forward progress in terms of the balance sheet or cash flow are kind of the superposition of 2 things, somewhat steady improvement. And you can see our year-over-year improvement in cash flow. And then this, kind of, semiannual sinusoidal curve, which is consuming cash more or less in the first half. And if we generate cash, it's more in the second half of the year. And as those 2 curves are combined, we can project forward progress that -- even the restrictions at all on what we want to do, we need to make sure that we have productive use of all our assets and capital expenditures, how we use demo units out in the field. And I don't really view that having more cash on hand would enhance our ability to accelerate what we're doing. I think we're pretty well matched for the group that we have and the plans that we can execute here in the short term.

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Christopher Cook Cooley, Stephens Inc., Research Division - MD [6]

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Great. And, if I could maybe just squeeze one more quick in and then I'll get back in the queue. Just on the migration of the IT business from Texas back to Ohio, I'm sure since the Cavs won last night, everybody's going to want to move back up to Northeast Ohio, so is that migration complete? And then, as a result of that how we expect to see some transitions there as well, when we think about the IT platform across multiple platforms?

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

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Sure. So for -- so we're all on the same page. What you call the IT business is our subsidiary in Texas called ASL. They make very high-end human-machine interfaces so that people with challenging disabilities can have full use of a powered wheelchair, a product to go about their daily living. That platform or that portfolio allows us to do tremendous things with our powered wheelchair products. And we're partway through that transformation. No issues there. It's -- there's some fair amount of engineering work that we do. And then, make sure that those products are compatible with our powered wheelchairs, that they're easily put on our order entry forms. And it's relatively a normal course, it's a relatively small business for us. But, that work's ongoing. It'll be completed this year, no big disruption. But not -- I would just probably not call it an IT business for everybody else that's out there, it is a product-based control business.

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Operator [8]

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Our next question will come from Bob Labick with CJS Securities.

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

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I was hoping we could get a little more color on the respi business in the U.S., in particular. And talk a little bit about the Platinum Mobile with Connectivity, the traction on that product. And if there are follow-on products coming with -- additional Connectivity products and if people are really gravitating to that new feature that you have?

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Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [10]

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Sure. We're pleased with the continued progress of the Portable Oxygen Concentrator, called the Platinum Mobile. This winter, we actually had good sales of all the product mix. And there seems to be good uptake of the informatics platform. We've got a balance of future plans, as you can expect with other products. But also with the kind of enhancements to the existing products, as software companies do from time to time. So that's been good. Probably the biggest future need, I think, for our portable business is just name recognition. There are some big players out in the marketplace with branding recognition at the product level and that drives probably a differential in sales between companies that are in the market space. So we intend to do some more to make sure that customers are aware of our branded product that's out there with those great features. More to come.

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Robert James Labick, CJS Securities, Inc. - President [11]

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Got it. And then, just taking that -- just I guess, I don't notice, is the connectivity on your respiratory -- or do you have mobile respiratory in Europe as well or is that just a U.S. product?

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

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The product is slowly coming out in Europe. It's a little different the way deploy in Europe, given country requirements. But that same capability will be available in Europe.

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Robert James Labick, CJS Securities, Inc. - President [13]

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Great. And then, sticking with Europe, you discussed the 2.6%, I believe, organic decline or constant currently decline in the quarter and how you've targeted some of that decline to reduced low margin sales. Can you kind of talk about the difference between the targeted decline and the rest of the decline versus your expectations. And what's working and what you need to do to resume growth or to stem that decline?

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Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [14]

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Yes, probably, a few more quarters of very mild sales decline, but we're looking forward to offsetting that with profitability improvement that we've discussed doing this for -- that's our goal, is to make sure we have the right mix. And it comes from essentially selling more clinically valuable products in the marketplace, which then translates to more economically valuable products to the company. So for me, as long as we still see gross profit improvement along the way, this mild decline for a few more quarters is probably okay. Overall, for the company, we might have slightly higher SG&A dollar expense, as we grow sales, although, we continue to look for leverage on that as a percent of sales going forward.

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Kathleen P. Leneghan, Invacare Corporation - Senior VP & CFO [15]

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I would also highlight from an operating margin perspective. Europe's operating margins were up Q1 of '18, when you compare them to Q1 of '17 or Q1 of '16. So we're happy with the performance by the European team from a profitability perspective.

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Robert James Labick, CJS Securities, Inc. - President [16]

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Great, yes, okay. Last one, if you could just discuss the drivers of the North American sequential improvements from here and the next milestones that we should be looking for.

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Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [17]

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Well, we expect general growth in all these segments. There is a little bit of seasonality in respiratory at the end of the winter flu season, so we'll see what that looks like. But we still expect positivity due to our PAC, which is still a relatively new product introduction from a year ago. Seating and mobility should continue to grow generally and we're looking for the IPG segment to continue to turnaround, as we shift customer mix and sell the higher-end integrated solutions that that business has. In Europe, it's still multiperiod, sales declines a little bit, looking for profit improvement and general improvement in Asia/Pacific as we've always been able to demonstrate between the business that's over there; our sales, our rental business and our manufacturing business.

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Operator [18]

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We'll hear next from Matthew Mishan with KeyBanc.

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

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I just want to follow-up on Bob's question on Europe. Is there any way you can call out what the impact of the portfolio mix shift is in that segment? And compare that to what the base business is doing?

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Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [20]

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We haven't done that before and it's different by country, based on how countries work with us and administer their own population healthcare. So it's difficult for us to do that. But I would say within each of the segments, there is a range of gross margin, powered wheelchairs have the less complex to the more complex, manual wheelchairs, beds, lifestyle products, they all do. And depending on how a certain country administers that and what products we're selling to them, there may be an opportunity to get into more clinically valuable products. It's not an easy general way, I think, to describe that. I don't know, Kathy?

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Kathleen P. Leneghan, Invacare Corporation - Senior VP & CFO [21]

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No, I think that that's true. We really don't segregate that to understand how much was really more transformation impact versus market impact. But overall, it was a decline in the quarter.

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Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [22]

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So I guess, how confident are you that the declines in Europe are from the transformation and not from changes in the base business?

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

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Well, I think overall, we look at win/loss rates and general businesses -- general business health and I think from the engagement we see from our Managing Directors there, and the different country performance we have, I don't think, it's anything that we view as general, we're all pushing towards the same thing, which is within those markets that we manage, how do we make sure we're engaging customers in the most meaningful clinical way. And I don't know, I don't think Kathy and I have seen anything that us makes us think this is anything other than more or less what we've expected.

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

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Yes, and then I think the input that we have had from the general management group is it's not like we're losing market share, it's just -- it was a slow quarter. And it was impacted by the transformation.

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Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [25]

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Okay. And then, in the outlook, in your press release, there was a slight change in language, where you did remove the word slightly as far as your expectation of reduce -- reduction in sales. Was that meant to signal anything or was that -- I just want to make sure that you're not -- your expectations aren't a little bit different for the change in sales in Europe as a result of this portfolio mix?

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Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [26]

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Interesting observation. No, no, absolutely maybe editorial indiscretion and not paying too much attention to eliminating that word slightly. No change in what we're expecting to do in Europe.

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Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [27]

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Okay, good to hear that. And then, shifting to North America/HME. I know 1Q is always a little bit tougher seasonally, but I'm just trying to gauge your sales momentum there. Any chance you can give us a sense of the cadence of the quarter, how you started January, February versus how you exited in March and how you started in April?

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

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Well, I think in December, we had some changes in our workforce that caused a little bit of disruption, which may be lightened up the quotes that led into the beginning of the quarter in our complex rehab space. But given what we've seen in the meantime, I feel really good about where that's going from here. And then, as we've discussed previously, we are having good interactions with our customers who we fully support. And I'm glad where we are with formulary additions and so on that happened during the first quarter. So I think there is more momentum in our future than in our past in all those regards.

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Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [29]

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And then I guess 2 more I'll squeeze in. On the free cash flow side, I think you indicated in the release also that you expect that 2018 outflow is now going to be equivalent to the 2017 outflow. Kind of how -- what is -- has anything changed in your expectations from the beginning of the year? Is that a function of maybe some of the opportunities you're seeing and may be more confident in the growth outlook, hence the working capital build?

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

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Yes, let me start Kathy and then I -- over to you. No change in the outlook for the year. The difference between last year and this year, while the total of cash flow consumption may be the same, operating performance we expect to be better, and then we'll have some more discretionary spending in 2018 that makes the sum of the 2 equal to probably about what we were at last year.

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Kathleen P. Leneghan, Invacare Corporation - Senior VP & CFO [31]

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And I would just highlight, we do have strong seasonality when you look at cash flow. So we're normally very cash flow intensive from a usage perspective in the first half of the year and then we generate cash in the second half of the year. But to Matt's point, the composition of the cash flow will probably change versus where we saw 2017, and so we're anticipating stronger profits out of each of the business groups, but there will be working capital usage, whether it relates to AR or inventory and mobility and seating (inaudible), as well as some CapEx adjustment.

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Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [32]

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Okay, great. And then lastly, can you just -- if you can just quantify what the incremental freight costs were in the quarter?

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

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We really don't disclose that level. I mean, it was significant enough that we listed it as an item. And it was clearly driven by the fact that we brought down inventory low at the end of December and we had backlog on products like lifestyle products where it's hard to gauge what that forecast is going to be. And so to expedite some of those orders in, we had to incur additional freight, but we're trying to manage that as we go through, but we don't really disclose that level of detail.

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Operator [34]

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Our next question will come from Jim Sidoti with Sidoti.

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James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [35]

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So with the situation with the FDA resolved, new products out there, have you started to increase staff at the Taylor Street's facility, ramp up in anticipation of greater sales yet? Or are you waiting for their sales to come before you ramp up the staff there?

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

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Well, it's a mix, we definitely have done things to increase the direct staff involved in manufacturing wheelchairs. The Elyria campus where the Taylor Street building is located also houses many other functions. So we've had a bit of mix shift in the talent that's been here and you would have seen some of the changes that we disclosed publicly last year. So yes, we're building direct capabilities, direct labor and materials, the other things that you would expect as we grow. No, there is no waiting on that. It's relatively proportional. And as we had discussed in prior calls, the Taylor Street facility had really remained physically at the same capacity as it had a number of years ago with much higher sales. So all we need to really do is add direct labor as we build back that business and we do that weekly or monthly, as needed.

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

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And then, is the composition of the sales force where you want it to be? Or are you still tweaking that?

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

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Yes, I think -- we like our sales force alignment as we have it now, good CRT or complex rehab technology alignment with our customers who are very important, good respiratory in corporate accounts and on the IPG business, same. Yes, I think, we've got a good setup at this point.

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

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Alright. And a lot of questions about cash flow today. I think, the main question is, are you confident with the cash you have on the balance sheet and the existing line of credit that you'll be able to get through the next period? I don't know if you want to say years -- couple of years, without having to do anything drastic to generate -- to get capital?

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Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [40]

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Yes, I have no hesitation saying a couple of years. We're very comfortable for as far as we can see in the future as this transformation plan to build the business back to our 2020 objective to the $100 million EBITDA run rate. Yes, no issues there.

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

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So no need to raise that to issue equity? You think you have enough cash on hand to get you through this transition?

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Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [42]

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Correct. Yes, no need.

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Operator [43]

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Now we'll conclude our question-and-answer session for today. At this time, I would like to turn the conference back over to Matt Monaghan for any additional or closing remarks.

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Matthew E. Monaghan, Invacare Corporation - Chairman, President & CEO [44]

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Thank you, Yolanda. And thanks to all of you for taking the time and your attention today on the call. Kathy, Lois and I will be available for follow-up questions and those can get coordinated through Lois. Thanks, have a good day.

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Operator [45]

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That will conclude today's conference. Thank you all, once again, for your participation. You may now disconnect.