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Invacare Corp (NYSE:IVC)
Q3 2020 Earnings Call
Oct 30, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Invacare Third Quarter 2020 Conference Call and webcast. [Operator Instructions] This conference is being recorded, Friday, October 30, 2020.

I will now turn the conference over to Lois Lee, Invacare's Director of Treasury, Investor Relations and Corporate Communications.

Lois Lee -- Director of Treasury and Investor Relations

Thank you, Sarah. Joining today 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 third quarter 2020 financial result, and providing investors with an update on our transformation and our response to the COVID-19 pandemic. 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 presentation at invacare.com/investorrelations. Further information can be found in our SEC filing. 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 third quarter earnings release. For an example of those items discussed on today's call that are considered non-GAAP financial information, such as constant currency net sales, constant currency sequential 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 slides and in earnings release posted on our website. I will now turn the call over to Matt Monaghan.

Matthew E. Monaghan -- Chairman, President and Chief Executive Officer

Thank you, Lois. Good morning. Before we begin, I'd like to start off by thanking all of our associates who have done an amazing job over the past eight months being flexible and quickly adapting to change. Through their persistence and hard work, we successfully balanced lower sales by making durable changes to minimize cost. We found innovative ways to engage with our customers and we kept our transformation plans on schedule. We also overcame unprecedented global supply chain constraints, which was also challenging and improved tremendously since the early stages of the pandemic. In addition, our pipeline of new products continues unabated with products that deliver innovative clinical solutions that are expected to drive incremental sales growth. Taken all together, these actions should result in long-term improvements to our business since a public company forward it depend on its result. Now let's turn to Slide three. We're pleased with our performance in the third quarter, achieving our 12th consecutive quarter of year-over-year improvement in adjusted EBITDA. As guided, we delivered higher consolidated sequential net sales, driven by a double-digit increase in Europe as a result of the initial easing of public healthcare restrictions, primarily in France and Germany, with the U.K. still remaining fairly closed. We continue to monitor our key markets and the potential impact on our business and believe we're prepared for the pandemic to sporadically recur during the winter months. In North America, we saw a continued strength in respiratory products, offsetting diluted sales in mobility and seating products due to its longer quote order cycle, which we'll cover in more detail on later slides.

On the balance sheet, we retired a significant majority of the 2021 convertible notes, leaving just over $1 million maturing in February of next year. Finally, our strong performance in the third quarter and our visibility into trends during the fourth quarter give us the confidence to raise our full year guidance for net sales and adjusted EBITDA. Turning to Slide four. In the third quarter, we delivered stronger operating income, both year-over-year and sequentially, continuing our track record of enhancing profitability. Additionally, adjusted EBITDA improved year-over-year and grew nearly 50% sequentially, driven by higher net sales and lower SG&A expenses. I'm pleased with our strong performance in this challenging environment, which demonstrates that our prior transformation initiatives are successfully driving improved results in line with expectations. Turning to Slide five. This is a chart we found helpful to depict the impact of the pandemic on our product lines over the past few quarters. As expected, we continue to see above normal demand for our respiratory products, specifically stationary oxygen concentrators, which are used as an essential part of COVID-19 care. With 95% of our sales in Northern Hemisphere, we anticipate continued elevated demand as winter weather forces more people indoors with pandemic blues occurring as a result. In our lifestyle category, we returned to more normal sales levels, having passed peak surge demand for bed and related products for pandemic care. Product mix shifted toward at-home care away from normally higher levels of institutional sales that have been lower due to limited access to long-term care facilities and lower admissions of new residents. In mobility and seating, we saw a general recovery in demand more immediately in Europe, which went from very strict measures to more normal healthcare access. As a result, reported net sales in Europe improved over 38% sequentially, although still lower than third quarter 2019. We saw a similar type of recovery in North America in the form of higher quote volumes in the third quarter, which we anticipate will lead to increase sales through the end of the year. Globally, we continue to launch an exciting full line of new products in all categories that will continue to drive customer interest and sales regrowth overall. We'll be ready to react to regional pandemic outbreak and related public healthcare measures, which we expect to sporadically affect sales, although not to the same extent as we experienced earlier this year.

We're pleased with the sequential improvement in consolidated net sales and believe this may be an early indicator that markets are beginning to recover. Turning to Slide six. Our solid third quarter results reflect the hard work the team has put into transforming the company. We delivered year-over-year and sequential improvement in operating results, and we expect this trend to continue as sales accelerate. As we close 2020, we remain on track with our key business initiatives. In North America, our IT modernization program is expected to launch in the first phase of go live during the fourth quarter. As the new and improved system rolls out across the region, these advanced systems should help us better engage with our customers with tools to improve the efficiency of our associates and optimize working capital. Customers would be able to use a more typical set of e-commerce tools we've all come to expect in our personal life. This more intuitive platform will advance our growth, and I'm excited about the many benefits the program we will provide both internally and externally. In addition, our German plant consolidation remains on track for completion in 2020. This consolidates operations across Germany and is expected to generate approximately $5 million in annual cost savings beginning in 2021. Underscoring the strength of our innovation culture, we were honored to have received awards in many categories for product excellence from a broad North American industry publication, including for our standing power wheelchair system and our SMOOV power add-on product. In addition, we were recognized by an expert rehabilitation organization for our contribution to the advancement in assistive technology rehabilitation engineering. These awards speak volumes about our associates who are developing great solutions for complex healthcare needs. In summary, we overcame multiple challenges during the quarter to drive sequential improvements in operating results and took actions to reduce total outstanding debt. At the same time, we made good progress in our key transformation initiatives to optimize the business and we launched several new products. We look forward to an equally successful fourth quarter to close out the year.

I'll now turn the call over to Kathy, who will provide a more detailed financial summary.

Kathleen P. Leneghan -- Senior Vice President and Chief Financial Officer

Thanks, Matt. Turning to Slide eight. Reported net sales declined 10.1%, primarily due to lower sales of mobility and seating and lifestyle products, partially offset by growth in respiratory products. Gross profit was lower by 40 basis points to 28.3% due to unfavorable manufacturing variances as a result of the lower sales volume. To offset this, we were able to drive constant currency SG&A down 12.5% or $7.8 million through reduced employment cost, lower commercial expenses and favorable foreign exchange. As a result, operating income improved by 21.2% or $500,000 and adjusted EBITDA was $9.8 million, up 2.5%, including the benefit of reduced SG&A expenses. Free cash flow usage was $1.8 million, unfavorable to the third quarter 2019 by $14.1 million due to working capital needed to support operating activities. Turning to Slide nine. Sequentially, reported net sales increased 8% and constant currency net sales increased 4.3%, driven by higher sales of mobility and seating products, including a 30% increase in Europe. Gross profit was lower by 60 basis points to 28.3% due to unfavorable manufacturing variances as a result of lower sales volume and the expected mix of lower acuity products as elective care resumed.

Constant currency SG&A decreased 6% or $3.4 million, driven by lower stock compensation expense, which is typically higher in the second and fourth quarters of the year. Operating income improved by $5.2 million, and adjusted EBITDA improved 48.7% or $3.2 million, driven by higher net sales and lower SG&A expenses. Free cash flow usage was comparable to the second quarter due to the benefit of higher profitability and lower inventory. As a result of lower net sales and higher working capital as compared to the third quarter 2019, we did not experience the same pattern of seasonality in free cash flow as we have historically. Turning to Slide 10. We experienced stronger sales of mobility and seating products, particularly in Europe. Lifestyle products continue to be impacted by limited access to long-term care facilities, while demand for respiratory products remained high. I will discuss the product lines in more detail within each segment. Turning to Slide 11. As a result of the initial easing of public healthcare restrictions, constant currency sequential net sales increased by 8%, driven by a 30.4% increase in sales of mobility and seating products, reflecting an early rebound in demand, particularly in France. We are beginning to see positive momentum in sales in our key countries of France and Germany, although the U.K. remains under relatively significant restrictions, as Matt mentioned earlier. Gross profit was 230 basis points lower due to the reduced net sales and unfavorable manufacturing variances, both impacted by the pandemic, which affected sales volume and product mix.

Operating income was lower by $3.8 million due to reduced gross profit from lower net sales, partially offset by actions reducing SG&A expenses, such as furloughs and reduced work hours. Moving to Slide 12. North America remained resilient, demonstrated by both year-over-year and sequential improvement in net sales. Constant currency net sales increased 1.2%, with growth in respiratory products partially offset by lower sales of mobility and seating and lifestyle products. As a result of the longer quote to order cycle for mobility and seating products in the U.S., lower sales in the third quarter were a direct result of lower quote activity in the preceding quarter when access to healthcare professionals and clinicians was limited. Sequentially, constant currency net sales of mobility and seating products increased 0.2%. We believe that demand for mobility and seating products are largely nonperishable, as evidenced by significant higher quotes in the third quarter, which are expected to convert into stronger sales for the remainder of the year. Gross profit increased 170 basis points or $2.6 million, driven by higher net sales and lower material and freight costs from prior transformation initiatives, partially offset by unfavorable variances and higher warranty expense. Operating income was $3 million, an improvement of $4.7 million, driven primarily by actions which lowered SG&A expense. Turning to Slide 13, all other, which includes the sales of the Asia-Pacific region, decreased by 3.1% on a constant currency basis, driven by lower sales of mobility and seating products, partially offset by higher sale of lifestyle products. Operating loss increased by $500,000 due to lower operating profit as a result of the dynamic control divestiture in the first quarter 2020 and improved $1.6 million sequentially, primarily driven by lower stock compensation expense.

Moving to Slide 14. As of September 30, 2020, the company had total debt of $273 million, excluding operating and finance lease obligations. As of September 30, 2020, the company had $87 million of cash on its balance sheet, which was sequentially lower, primarily as a result of proactively repurchasing $24.5 million of convertible notes in the third quarter. We are pleased to have retired the significant majority of these notes, which increased our financial flexibility, reduced ongoing interest expense and leave a balance of less than $1.3 million maturing in February of 2021. We remain confident that our balance sheet will support us through the transformation. And as always, we continue to assess opportunities to further optimize our capital structure. Turning to Slide 15. As a result of the sequential improvement in business performance achieved in the third quarter and our visibility into the fourth quarter, we are updating our full year guidance for 2020. The company anticipates consolidated net sales to improve sequentially in the fourth quarter 2020, but remain lower than the fourth quarter last year based on continuing access to healthcare facilities without new public health restrictions and from the adoption of new products.

While the markets are expected to continue to remain open, pandemic-related closures may vary in regions over the winter months. For the full year 2020, the company now expects reported net sales of at least $840 million, up from the previous range of $810 million to $840 million, driven by the expected recovery of sales based on the recent trends we've seen in the early part of the fourth quarter. Adjusted EBITDA in the range of $28 million to $32 million, up from the previous range of $27 million to $30 million due to the benefit of prior transformation actions and our continued ability to optimize cost. And free cash flow usage in the range of $8 million to $12 million, changed from the previous range of 7% to 10%, given the timing of the recognition of sales during the fourth quarter delaying the collection of cash into the first quarter of 2021.

I will now turn the call back over to Matt.

Matthew E. Monaghan -- Chairman, President and Chief Executive Officer

Thanks, Kathy. So far, 2020 has been a year like no other. It's impossible to overuse the word unprecedented as the pandemic has impacted almost every aspect of our daily lives, yet while we were still able to achieve year-over-year improvement in our operating results despite those continuing challenges. Over the company's recent history, we faced adversity and we've always been up to the task. Our transformation initiatives will drive our return to profitability and create a stronger, more agile organization, which will unlock further shareholder value. We're already seeing the results of the diligent work. We know there's plenty more progress to be made ahead of these challenges. I believe it's even stronger, and I'm confident in our continued progress. We want to thank everyone for your continued support of Invacare and for taking time for this morning's call.

We'll now take questions.

Questions and Answers:

Operator

[Operator Instructions] The first question here is from Bob Labick with CJS Securities.

Robert James Labick -- CJS Securities -- Analyst

Good morning. Congratulations on a nice quarter.

Matthew E. Monaghan -- Chairman, President and Chief Executive Officer

Good morning, Bob.

Robert James Labick -- CJS Securities -- Analyst

Yes. So in the release, I'll paraphrase, I think you talked about something like assuming markets begin to normalize in 2021, new products could drive sales levels above the 2019 levels, which sounds fantastic. So I was hoping you could elaborate a little bit on which new products are expected to be the biggest drivers and how you're looking at that opportunity. I'm not trying to pin you to an exact number, but just a little more color behind that statement, please?

Matthew E. Monaghan -- Chairman, President and Chief Executive Officer

Sure. It is a good question. And it's one of the points of greatest pride that the pipeline of new products we have. We have new products, Bob, in every category of our global product line. So starting in mobility and seating we have a new front-wheel drive chair that came out at the very end of last year, and we're not yet seeing the full room of growth there. Normally takes a little while for things to accelerate. We've seen great interest, but we've seen that continue to 2021.

We have rear-wheel drive chairs coming out in all regions of the country. We expect updates to our center-wheel drive chair. We have a standing seating system that's going to be across all the platforms. We really have great things coming out in mobility and seating. We continue to deploy our new manual wheelchair line, super high performance, very precise driving ability that continues to spread across the country. And our Alber power add-ons with the SMOOV for manual wheelchairs and the e-fix and e-motion products that help other kinds of wheelchairs be electrified for mobility continuing to grow. So in mobility we've seen incredibly strong.

On the respiratory side, we expect updates in stationary oxygen concentration beginning later this quarter, fourth quarter into next year and beyond. We're revitalizing that product line. And in lifestyle, we have events, new lifts, new slings, new hygiene products. So we really think -- while we've been focusing on getting cost reductions right and optimizing our spending for the pandemic sales levels, we haven't slowed down our pipeline of new products. And so when assuming markets recover in 2021, and all those products are ready to be out in the marketplace, there should be strong sales growth.

Robert James Labick -- CJS Securities -- Analyst

Okay. Great. And then kind of expanding on prior conversations, maybe talk a little bit about the new product designs that you've just -- that you just mentioned and how they're better suited to grow the sales. I think pricing is potentially better along with better margins. So just kind of remind us the changes you've made into these new products, which you think will enable better pricing uplift in sales with stronger margins?

Matthew E. Monaghan -- Chairman, President and Chief Executive Officer

Yes. So it's an important question because you can't -- nobody can develop products for technology's sake. It's really got to be focused for a person and a purpose. And we try to be very intentional on putting two things together. What are we doing to have the best clinical solution that meets reimbursement needs so that people who want that solution can afford it in all the different markets and different reimbursement programs around the world. And we have to continue to make it easier for providers who are our customers to buy those, to operate those, to refurbish them and maintain in their fleets and meet their expectations of high, high reliability.

And we've gotten really good at putting consumers at the center of the design intent for features, for the clinical features, that part of all of our product designs. And we've gotten better at understanding the provider pain points, all the way from what we're doing to minimize packaging when the product arrives to easy setup to refurbishments and self-diagnostics to more remote connectivity to lower provider cost. And of course, we want our products generally to be very durable. So we continue to improve our designs to make that even better. And I think that's going to continue to be really important. We have to keep our economics for our providers. And we're sure that that's the path forward for us.

Robert James Labick -- CJS Securities -- Analyst

Okay. Great. Last one for me. I'm not looking for specific numbers here, but a little while ago, you have had out kind of run rate, $85 million to $105 million of EBITDA. And obviously, the pandemic hits or time horizons change and things like that. But just looking forward, can you talk about the puts and takes versus that original guidance range? Are there any permanent changes versus then? Or is it timing-related? And how are you still thinking about the march forward and the opportunity for future growth?

Matthew E. Monaghan -- Chairman, President and Chief Executive Officer

Yes, no change in our expectation that the enterprise can deliver that kind of EBITDA. And we're less concerned about the specific revenue number. Revenue is lower this year than we had planned it to be obviously with the pandemic. We continue to be very economical on our cost and balance cost with activity levels that have changed during the pandemic. We'll be out after our fourth quarter earnings release with an update on the longer-term plan, but we fundamentally don't see any change in our ability to hit that $100 million EBITDA run rate number in a reasonable period of time.

I think when we step back and look at it at the end of the year, we'll see a certain number of quarters of delay. And in the meantime, we've continued to take cost out of the enterprise in durable way. We talked about the German plant consolidation, which was always planned to be done this year. It's absolutely on track, and we'll expect that $5 million savings for all 2021. So all the ingredients are coming together, and we'll just have to look to the recovery in the market out of the pandemic that -- and we see that very strongly coming back already. So I don't think we're too far away.

Robert James Labick -- CJS Securities -- Analyst

Okay. Thank you very much.

Matthew E. Monaghan -- Chairman, President and Chief Executive Officer

Thanks, Bob.

Operator

All right. Once again [Operator Instructions] And the next question is from Mike Matson with Needham.

Michael Stephen Matson -- Needham & Company -- Analyst

Good morning. Thanks for taking my question. I just want to start with Europe. Good to see the sequential improvement there, but we're seeing investors kind of freaking out over what's happening there with shutdown -- new shutdowns in France and Germany. And your commentary seemed a little bit more, I guess, upbeat about the outlook there, not denying there will be some sort of impact. How do we get comfortable that we're not going to see a repeat of kind of what happened in the second quarter in those areas, I guess, in Europe, that is? Thanks.

Matthew E. Monaghan -- Chairman, President and Chief Executive Officer

Yes. That's a really important thematic question, Mike. I'm glad you asked it. In second quarter, when this was first being encountered in the Northern Hemisphere, let's say China and some other places were a little ahead of us. But in the Northern Hemisphere, we didn't have a playbook. We didn't really know what was happening, and everyone was dealing with it and making up the plays as they went along, and it was happening quite simultaneously. At this point, as we look forward, we expect that this kind of temporary shutdown will absolutely occur. But we think two things are very different that optimize the future versus the past.

First of all, we've kind of learned to deal with it. So back in the second quarter, hospitals shut down and they did only COVID care and people weren't too concerned or unable to get into other health -- other doors in the healthcare facility to have access to the kind of products we need. By now, healthcare facilities have had four or more months to figure out how to continue to deal with COVID. It didn't go away in the meantime. It just abated a little bit. Figure out how to deal with it and still allow the citizens in the catchment area to come in other doors to healthcare facilities to get elective care and other less essential care. And we think that knowledge that's been built up with the healthcare community is going to continue to make this go better.

I think we also expect it's not going to be as simultaneously occurring in as many places. So Germany might shut down for two to four weeks to get ready before the winter holidays, which they want to have with less -- with fewer restrictions. France might do it for a few weeks, but they're doing those actions to get through this and get back to normal business. Back in March, it was March, April, May and longer, and it was many countries simultaneously. So we think that will help. The other thing I think maybe to add a third component, healthcare facilities need to have a full line of services being offered to remain healthy institutions.

And we will absolutely take care of COVID patients as much as they're needed. But especially in the for-profit nongovernmental enterprises, like we see in North America, France, Germany, they need to be doing cardiac and orthopedic procedures and other procedures to remain financially healthy. And so they're very motivated to make sure that other people can come in and have access to healthcare. And I think finally, Invacare typically serves a lot of nonperishable healthcare needs. So those healthcare needs haven't gone away.

Somebody had a diagnosis that was going to be a permanent reduction of abilities, let's say in May or June, they're going to have to have a way to have that healthcare provided at some point. So we think that accumulation of need, the access to healthcare and the non-hermetic, non-parallel actions of all these countries is likely to be more benign than it was in the second quarter. And even though it happens, it will come and go for probably through the winter, and I think we're prepared for that.

Michael Stephen Matson -- Needham & Company -- Analyst

Okay. Makes a lot of sense. And then just on the this, the news around competitive fitting and the their care is kind of tailored to generate savings, I guess it shows that you can't get less from the stone, so to speak. But how big of a positive is that for Invacare specifically, the fact that the rates are going to kind of remain unchanged in '21 and for the foreseeable future, I guess?

Matthew E. Monaghan -- Chairman, President and Chief Executive Officer

Yes. I think -- it's a good question. I think obviously nobody was exactly sure how it was going to come forward in the new round. Stability is growing for the industry. So they have three years where we can expect, or industry can expect similar results to be really helpful. Of course, our providers have taken a real shellacking with reimbursement reductions over the last five years. So while we'd like everyone to have a little bit more to cover increases in cost and especially recently because it costs more to conduct business safely with personal protective equipment cost that are different than the past, at least, it's not going down, and it leaves, we have three years of stability. Business people can plan around that. So I think that's really positive for everyone. And then we'll of course advocate for productivity improvements and whatever we can do to help the industry move forward.

Michael Stephen Matson -- Needham & Company -- Analyst

Okay. Thank you.

Matthew E. Monaghan -- Chairman, President and Chief Executive Officer

Yes.

Operator

And your next question is from Chris Cooley with Stephens.

Christopher Cook Cooley -- Stephens Inc -- Analyst

Good morning. Let me look ahead a little bit to calendar '21. And without talking specifics, I'm just curious, you mentioned that this was unprecedented year, which would fully agree with. But how do you think about cash flow for calendar '21? And I'm not really specifically going after a hard number, but I'm thinking more so about kind of the sequential flows here. Historically we've seen larger uses in the first half, generation obviously in the back half. And with the new product cadence that you have coming out, probably a little bit higher working capital utilization early on, but also some savings programs coming in. I just -- just kind of hoping you could help us think a little bit about what's going to be different about '21 versus, let's say, a more normalized year when we think about your cash flow patterns. And I have one quick follow-up. Thank you.

Matthew E. Monaghan -- Chairman, President and Chief Executive Officer

Sure. Yes, it's a good question. We've been polishing the crystal ball here to get our best view of the future. It's a little early to be too specific about 2021, but I'll tell you thematically, I think what we might all expect to be a little different. Normally, Invacare has its strongest quarter for EBITDA in third quarter. Fourth quarter is almost as good, and cash flow is generally better in fourth quarter in a normal historic cycle because in fourth quarter we're collecting some sales in third quarter. So that's it. And then first and second quarter are not quite as good as the third and fourth.

This year, that pattern is going to be probably overwhelmed by pandemic. And as we go into 2021, that curve probably in the first quarter, we're not sure if it will be as low or higher. There could be some offsets like we saw in the first half of last year in the effect of pandemic on certain product lines better or worse. It shouldn't be bigger amplitude changes than we saw last year. And I think it's Slide five in the deck that shows the graph on how the pandemic affected different product lines.

That might happen again. But we assume the amplitude smaller and we've shown we can get through that successfully. And then I think probably by summer, there's the confluence of vaccines, people being outdoors, people getting yet further acclimated to dealing with pandemic if it's not fully resolved and the strength of our mobility products, which typically does better in warm weather months when people want to be outside ambulating should help us.

I think we're going to have to look past the normal seasonal cash flow and revenue cycles that drive cash flow for next year and look at something that's a little more driven by the recovery. And we still have inventory that we built up in second quarter this year that we haven't fully liquidated. It's improved for sure. But it's going to take us a couple more quarters, and that should have some cash flow benefits too that offset any other differences in normal seasonal cash flow.

I don't know, Kathy, if you'd say anything else?

Kathleen P. Leneghan -- Senior Vice President and Chief Financial Officer

Yes. I think the other thing, just in general, the improvement in flow that we anticipate in 2021 obviously would be impacted by an improvement in the profitability of the business. And then to Matt's point on -- really on the working capital side of the hospice inventory, this year, we have built up a significant amount of inventory and we will not to anticipate that we would repeat that next year.

Matthew E. Monaghan -- Chairman, President and Chief Executive Officer

Yes, good point.

Christopher Cook Cooley -- Stephens Inc -- Analyst

Super. I appreciate all the color there. And then maybe just lastly for me. Again, unprecedented year. Lots of opportunities for evolution and for learning here. And so when you think about how you approach the upcoming year in 2021, anything new in terms of the way that you would build a market to maybe be more efficient with cost savings basically being more permanent? And similarly, have you seen any changes, whether it be from timing of competitive bids that are out there, or I should say tenders? Or just the way that your consumers who are in market is basically pulling product? I mean, any changes there that would affect either growth or margin that we should be aware of? Thank you.

Matthew E. Monaghan -- Chairman, President and Chief Executive Officer

There are a lot of things in the constellation of our plan for next year that should continue to drive improved profitability. There'll be more of them and probably slightly less -- slightly smaller magnitude this year -- than this year. In this, we have a huge set of plant moves going on in Germany, and the team has done a fantastic job to remain on track even though training workers, moving products, moving inventory is a lot harder with social distancing restrictions.

The team is going to try keeping that going. There are still waves of improvements to be made. But now we're probably more inside the existing four walls to improve how we transform raw material and move purchase finished goods through our system more economically. I think on the sales side, we're going to try to hang on to the best practices that we've evolved in the pandemic. There should be, as you can imagine, more productive ways to engage with our customers in ways our customers, not a formally -- I've been to open video conferencing and video consultations with their clients and so on.

We want to make sure we hang on to those as much as possible. And we've developed new tools to do a better job of that, to train remotely to do contact-free delivery of products, to configure products more precisely so that there's less work that has to be done by our customers when that product finally gets delivered to the end user and needs to fit them very perfectly, those will help. And then I can't overestimate what we're expecting out of our new IT tools and modernizing interactions we have with customers.

We haven't externally put a value on that, but you could imagine the difference between walking into an old retail location versus what you have in Amazon kind of way today as consumers, we all enjoy that. We want to get those kind of tools to our customers so that they could interact with us with much less friction than they have today. So we get the benefit of all the great products with a lot year transactions, and we think that's really great.

And then for our employees to give them modern tools to do their jobs more effectively and have better information right at their fingertips is going to have remarkable changes, it's really the ease with which they can do business and how well they can serve customers. And we think that's going to really help. And people can see what our objectives are on the P&L because we still expect to get to that 35% gross margin, 25% for less SG&A, that 10% EBIT margin and our IT tool is going to be a big driver of enabling that.

Christopher Cook Cooley -- Stephens Inc -- Analyst

Thank you.

Operator

All right. And once again [Operator Instructions] And the next question is from Matthew Mishan with KeyBanc.

Matthew Ian Mishan -- KeyBanc Capital Markets -- Analyst

Good morning,guys. And thank you for taking the question.

Matthew E. Monaghan -- Chairman, President and Chief Executive Officer

Good morning, Matt.

Matthew Ian Mishan -- KeyBanc Capital Markets -- Analyst

Hey, Matt. Just do you have a sense of how you're dealing in seating and mobility compared to the market?

Matthew E. Monaghan -- Chairman, President and Chief Executive Officer

It's a good question. Yes, hard to say what the market is in this pandemic cycle. I feel good about it. I have to say that new products -- in new products that have new features for people, features that people want and products that fully fit within reimbursable limit, there's a lot to attract customer interest and user interest. So we've had no shortage of demand during this pandemic. I mean it's down over prior year. But the engagement with customers has been phenomenal. Those awards that I mentioned in the prepared remarks reflect the industry's reaction to our products.

So it's not just the company thinking all by itself in its own backlog new products. We're getting independent verification of that. And we're doing well. We've maintained the budget to get demonstration units out there, and we found ways to train and expose customers to new products in virtual socially safe means, and it's really been exciting. So I can't answer your question with any precision. We're a little frustrated about that ourselves, but it feels really good with the growth rates and the sustained levels of interest we've had.

Matthew Ian Mishan -- KeyBanc Capital Markets -- Analyst

Totally understood on that. And then just following up on some of the questions around 2021. I think the way I'm going to ask the question, if sales stay flat year-over-year, and I'm not expecting them, I just heard the purposes of assumptions. Can you talk through some of the expected company-specific cost savings that you expect to realize from your restructuring and new ERP versus costs that could come back?

Matthew E. Monaghan -- Chairman, President and Chief Executive Officer

Yes. So we could kind of start from the top of what P&L and go down. So we expect to have -- we do expect to have sales growth for sure. Inside the four walls of our factories, there's a tremendous amount of optimization we can do. We have a whole cadre of bright people who are optimizing how we convert raw materials and move purchase finished goods through warehouses. And if you don't do it super-efficiently, you can waste a lot of cost by touching things too many times. And the corollary benefit of that is we continue to expect working capital to improve as inventory flows more rapidly through our system.

There's a huge focus on that. Some of it, the addition of new great people to the organization and the retention of really great people in the organization already and giving them new tools from our IT update. So that will really help us improve. And our function team in prior times has done a lot to offset tariff that you remember came in at the end of 2018, and we've had a lot of good activity, having since been able to apply them beyond tariff reduction to just productivity improvements.

So we expect a fair improvement still in gross margin. Now we saw that get a little accelerated with the shift in acuity of products and product mix in second quarter that went backwards a little bit as we expected in the third quarter as elective care returned. But that's just a temporary shift as we generally move forward with better and better gross margins over time. And you can see the history of our [Indecipherable] in the past. And you know that. And then next year, we'll also have that $5 million of full year savings from the improvement in the German factory network footprint.

In SG&A, we should have definitely sales -- cost of sales improvement because our great sales team is on way to be more productive. So for dollar of sales, we're getting more out of the team, great sales team, and we want to keep adding to the sales team to drive more sales growth, that's really positive. And then tons of cost reductions from G&A activities as we're having less effort in the transactions to help customers do business with us and operate our enterprise. It's a lot of great tools coming out of SAP, and happier employees too, I think, as the jobs will be done more easily. So all the way down the P&L, we see benefits that continue to be coming our way in 2021 and beyond.

Matthew Ian Mishan -- KeyBanc Capital Markets -- Analyst

I guess is 2021 the right year at this point to you guys to visibly show the real -- I mean, without giving an actual -- but it sounds as if 2021 is the year in which you guys can visibly show the new cost improvements and of a lot of the transformation?

Matthew E. Monaghan -- Chairman, President and Chief Executive Officer

Well, I think when you talk about 12 consecutive quarters of EBITDA improvement, I think we've been showing in a long time. And we've had great dialogue with you over time, and I think people have come to appreciate that we don't just deliver in easy times, and especially this year, we've delivered in tough times. We delivered in times with new tariffs that were coming without notice. And the first three quarters of this year, still carrying on going 10, 11, 12 consecutive quarters improvement with the pandemic, we're definitely going to keep doing this.

We know how to improve business. And I guess it's after 12 quarters, people are still looking at evidence about whether we can improve. They're not sure what kind of billboards we're going to move to light up to get people to see how this business has improved. It's really fantastic work. If we hadn't been through the pandemic, you could usually extrapolate where we would have been this year. And we can all have our personal opinions on how the pandemic is going to evolve. But we're not using that as an excuse, we're still turning in EBITDA improvement every quarter, which I'm really proud of on behalf of the team truly. It's been fantastic.

Kathleen P. Leneghan -- Senior Vice President and Chief Financial Officer

Yes. Yes. That's absolutely true. We've had many actions over the years to improve the profitability obviously in the North American segment, which was significantly impacted by other issues. But you just look year-over-year, the North American segment's operating profit has turned from a loss to a profit and improvement in -- if you look at year-to-date '20 versus '19 of over $13 million. The European business has always been a healthy business for us. Obviously, this year they've been significantly impacted by the pandemic. We would anticipate that business is going to come back as we spoke about because it's all durable demand. The business has made tremendous improvements year-over-year in cost savings actions that are reflected in our financials.

Matthew Ian Mishan -- KeyBanc Capital Markets -- Analyst

Okay.

Operator

All right. There appear to be no further questions at this time. Matt, I'd like to turn the conference back to you for any additional or closing remarks.

Matthew E. Monaghan -- Chairman, President and Chief Executive Officer

Okay. Thank you, Sarah, and thanks to everybody who joined us with their time this morning. Kathy, Lois and I are available for any follow-up questions, which we coordinate through Lois. Her contact information is on our website, Investor Relations. Appreciate everyone's support. And take care. Thank you.

Operator

[Operator Closing Remarks]

Duration: 44 minutes

Call participants:

Lois Lee -- Director of Treasury and Investor Relations

Matthew E. Monaghan -- Chairman, President and Chief Executive Officer

Kathleen P. Leneghan -- Senior Vice President and Chief Financial Officer

Robert James Labick -- CJS Securities -- Analyst

Michael Stephen Matson -- Needham & Company -- Analyst

Christopher Cook Cooley -- Stephens Inc -- Analyst

Matthew Ian Mishan -- KeyBanc Capital Markets -- Analyst

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