Invacare Corporation (IVC) Q2 2021 Earnings Call Transcript

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Invacare Corporation (IVC)
Q2 2021 Earnings Call
Aug 5, 2021, 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 Second Quarter 2021 Conference Call and webcast. [Operator Instructions]

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

Lois Lee -- Director, Treasury, Investor Relations And Corp. Comm.

Thank you. Joining me on today's call to indicate are Matt Monaghan, Chairman, President and Officer; and Kathy Leneghan, Senior Vice President and Chief Financial Officer. Kathie will be reviewing our second quarter 2021 financial results and providing investors with an update on our full year outlook. Health Investor [Indecipherable] along created slides to accompany this webcast. For those dialing in, you can find the link our webcast slide presentation at invacare.com/investorrelations.

Further information can be found in our SEC filings. Before Matt begins, I'd like to note that during today's call, we may make forward-looking statements about the company debate 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 second quarter earnings day. For an explanation of items discussed on today's call that are considered to be non-GAAP financial information such as constant currency net sales, constant currency SG&A, free cash flow and adjusted EBITDA, please be denote in the appendix of our webcast slides or any related resin the slides and the 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, and good morning. Starting on Slide three, we entered the year with confidence that our second quarter will be a pivotal quarter moving beyond the going to grow revenue. I'm pleased to announce that we achieved constant currency net sales growth of 7.8%, with increases in all key product categories. Importantly, mobility and seating products rebounded strongly at constant currency net sales growth of nearly 18% in Europe and over 12% in North America. By region, net sales in both Europe and North America achieved significant growth that Healthcare has improved in key markets and customers showed strong interest in new products. We continue to see increasing demand for all of our products as evidenced by strong order intake in quote rates and higher than normal backlog. As a result, in addition to strong sales in the second quarter, demand continues to support elevated order backlog. We ended the second quarter with $15 million of higher backlog than normal, similar to the level at the end of the first quarter. The continued higher backlog is expected to convert to sales over the next two quarters as we work to fulfill higher demand in the enrolling supply chain disruption.

On the cost side, we saw a good improvement in gross margin from favorable sales mix and the benefit of prior actions to optimize the business. These were more than offset by supply chain-related disruptions as our factories ended more changeovers and shifting production plans to deal with intermittent part shortages and chipping plays, which accounted for 80% of the margin decline. Higher material, freight and logistics costs, offset by variable sales is accounted for the other 20%. Our operations team is very focused on improving efficiency and costs. We view the impact on gross margin is temporary and are taking actions to rectify it. Importantly, we expect gross margin to rebound through the remainder of the year. [Indecipherable] cash flow to support sales growth during the quarter, usage increased due to higher accounts receivable balances and elevated inventory levels, which Kathie will expand on later. We expect working capital to normalize by the end of the year cash is collected and inventory is converted to sales. Overall, second quarter results were largely in line with expectations with strong revenue growth both year-over-year and sequentially in all major product lines in Europe and North America.

We're please with the progress we're making year-to-date and look forward to even stronger results in the second half. Turning to Slide four, the business environment and access to healthcare continue to improve and remain well positioned to achieve our full year guidance. As a reminder, while the economy and in variance of the world continues to reopen, we're still flattish in North America and Europe, where access to our key customers and challenge some of the [Indecipherable]. As we experienced this quarter, we anticipate sales will continue in the back half of the year. Interest in recently launched products in helping invasive customers to provide end users with even more capable devices. Early in the third quarter, we launched a new rear-wheel drive power wheel share in North America, the AvivaSTormRx, which complements our full portfolio of best-in-class seating across all drive segment. Our [Indecipherable] wheelchairs allows end users the best in seating and complex control solutions and the best driving front or percent we drive share for their environment. In addition, in respiratory, our new T5 NXG visionary oxygen cone is now commercially available in the United States with plans to roll out further in the coming months. As we focus on sales growth and increased customer demand, we look forward to meeting our customers with new tools and our expanding IT platform, especially with more modern customer self-service features. At the same time, we're very focused on improving operating efficiency by reducing friction and removing costs from our business system.

While we expect the global supply chain will persist in the near term, we're taking proactive measures to offset them, such as investing in additional inventory, looking and planning freight further into the future to ensure time in receipt and delivery and more precisely planning manufacturing schedules to better match the anticipated reliable component. As these mitigation efforts become more effective, we expect gross margin to expand significantly from second quarter results, which, coupled with sales growth should meet profitability. All things taken together, we remain confident in our ability to achieve our full year guidance as we continue to see strong demand across all product categories to convert our excess order backlog into sales with actions to sustain gross margin and leverage SG&A. All of these positive indicators support our conviction that Invacare is pivoting to a period of long-term gorwth.

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

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

Thanks, Matt. Turning to Slide six. Reported net sales increased 15.1%, with growth in all product categories and in all regions. Constant currency net sales increased 7.8% driven by double-digit growth in both mobility and seating and respiratory products. We are pleased to have achieved strong sales growth, driven by new orders received during the quarter. And for mobility and seating, we are also seeing increased revenue from new products. Gross profit increased $4.2 million due to higher revenue and the benefit of favorable sales mix. As Matt mentioned, gross margin was significantly impacted by supply chain-related client disruptions and to a lesser extent, higher freight and material costs. The company has taken and continues to implement various actions to reduce the impact on the business, including reduced work hours in certain locations, into the anticipated timing of the receipt of components and investing in increased inventory, much of which was received in the latter part of the second quarter. SG&A expense returned to a more normalized and was higher than the prior year as the second quarter 2020 benefited from reduced commercial expenses and discretionary spending given the significant impact of the pandemic on the business.

This year, SG&A expense includes increased funding for sales, marketing and commission programs to support and drive revenue growth. As sales strengthened, free cash flow was also impacted higher levels of accounts receivable that we expect to be collected during the second half of the year. In addition, as previously disclosed, the company increased inventory levels to mitigate supply chain disruption and to prepare for the expected sequential sales growth in the latter half of the year. We anticipate this investment in inventory will convert to cash in the second half 2021 and enable us to achieve our free cash flow guidance. Turning to Slide 7. Reported net sales in all product lines improved year-over-year despite supply chain challenge, which limited the conversion of orders for shipments and resulted in excess order backlog of $15 million, primarily in Europe. Mobility and seating products achieved net sales growth of 15% to strong growth in both Europe and North America, benefiting from the increased adoption of new products introduced over the past 18 months. Constant currency net sales increased 2.9% for lifestyle products even compared to a particularly strong Q2 2020 that benefited from pandemic-related bed sales. Growth this quarter was led by higher sales of manual welters, hygiene products as well as growth. Retinal respiratory products was driven by continued strong demand in North America related to the pandemic. Turning to Slide eight. Europe constant currency net sales increased 7% driven by an 18% growth in mobility and seating and over 6% increase in lifestyle products, partially offset by lower sales of respiratory products.

Gross profit increased $507 million due to strong revenue growth and favorable sales mix, offset by supply chain-related plant disruptions and higher freight costs, resulting in flat gross margin. Driven by higher net sales, operating income increased by $2.8 million. Overall, we are encouraged by the improving healthcare access in key European markets, which helped drive our significant rebound in sales and profitability. Turning to Slide nine. North America achieved constant currency net sales growth of 10.1%, driven by increased revenues in all product categories. Mobility and seating products generating constant currency net sales growth of 12.6% and respiratory products grew by 24%. We achieved exceptionally strong growth in the quarter for mobility and seating products, benefiting the increased adoption of new products. Gross profit declined $900,000 as favorable sales mix was more than offset by previous mentioned supply chain challenges, driving 150 basis points decline in gross margin. Operating income decreased $3.2 million due to reduced gross profit and higher SG&A expense to support revenue growth. Turning to Slide 10.

Constant currency net sales in the Asia Pac region decreased 7.7% due to lower sales in lifestyle and mobility and seating products partially offset by growth in respiratory products. While the Asia Pacific region continues to see strong demand, net sales growth was impacted by global shipping issues to stabilate the receive of products. Operating loss increased by $1.8 million, primarily due to lower profitability in the Asia Pacific region impacted by lower net sales favorable gross margin and higher SG&A expense. Moving to Slide 11. As of June 30, 2021, the company had total debt of $322 million excluding financing and operating rate obligations and $78 million of cash on the balance sheet. As a result of revenue growth, the company had higher receivable, which led to an increase of 7.4 days in sales outstanding as compared to the end of the first quarter of 2021, impacted by the timing of collections from revenue recognized in the quarter. In addition, the company had higher inventory levels to mitigate supply chain challenges and to prepare for the expected sales growth in the second half of the year. As discussed, we anticipate both metrics to normalize by the end of the year and drive positive free cash flow for the full year of 2021.

Turning to Slide 12. Based on our visibility into the third quarter, we are reaffirming our full year guidance for 2021, consisting our constant currency net sales growth in the range of 47%, adjusted EBITDA of $45 million and free cash flow of $5 million. Constant currency net sales are anticipated to increase sequentially in the third and fourth quarters of 2021. Our outlook is supported by positive sales trends such as strengthening order demand, mobility and seating product sales, which historically peak in the summer months, the conversion of excess backlog in the sales, increased adoption of new products and the continuing reopening of key markets and channels. In addition, gross margin is expected to improve driven by revenue growth, favorable sales mix and actions to resolve supply chain challenges at our [Indecipherable]. Over the next few quarters, we are taking steps to mitigate this impact where possible. As a result, improvements in adjusted EBITDA and free cash flow could accelerate for the second half of 2021.

I will now turn the call back over to a Matt.

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

Thanks, Kathy. Turning to Slide 13. I want to first thank all of our associates who put in extraordinary efforts to support our customers as we all recover from the impact of pandemic. As we enter the second half of the year, I'm incredibly excited about the positive trends in our favor, which bodes well for a strong finish for the year. We anticipate the continued easing of healthcare restrictions, combined with strong demand, favorable sales mix and the fulfillment of excess backlog will drive robust revenue growth and profitability. As seen in previous years, Invacare has a long history of generating a substantial majority of its adjusted EBITDA in the second year, and this year is expected to be similar. Taken together, we have continued confidence in our ability to meet our 2021 goals and to remain focused on executing our long-term growth strategy.

Thank you for your continued support of Invacare for taking time for this morning's call. We'll now take questions.

Questions and Answers:

Operator

[Operator Instructions] We'll now move to our first question one, which comes from Bob Labick from CJS Securities. Please go ahead.

Bob Labick -- CJS Securities -- Analyst

Good morning.

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

Hello bob.

Bob Labick -- CJS Securities -- Analyst

So very nice quarter. And obviously, we're encouraged by the continued outlook. And I just wanted to start with North America and mobility and seating. There was a strong sequential pickup in sales of $31 million in the quarter. And I wanted to ask, how much of that is a snap back from the weaker Q1? Or is the kind of $31 million quarterly run rate a new level that you can grow off of? How should we think about that big swing from quarter-to-quarter?

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

Yes. I think we're looking at the general recovery of the market and continue to overall organic growth of the business based on new products, I think we grow from European the ability to ebb.

Bob Labick -- CJS Securities -- Analyst

That's fantastic. Yes. And I guess I'd ask the same question as it relates to respiratory. And I think you mentioned that product has now launched. Was that in the sales in the quarter? Or is that benefit going forward? How should we think about the new respiratory products in the sales level of respiratory?

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

Yes, that's going to be benefit going forward. It is available sale, but it's just getting started now. So no effect of that in the second quarter. At some point, we'll see a muting of respiratory sales endemic demand riders at some point, that will be expected happened, Lifestyle should continue to go forward and grow. We still have opportunities to grow in Lifestyles. I was really pleased with Lifestyle growth in the quarter. I think we all work the strong second quarter last year, and we still grew on top of that this year, and we're still more opening long-term share of facilities to other forms of growth, we expect I think a good outlook for really all our segments.

Bob Labick -- CJS Securities -- Analyst

Okay. Super. And then Obviously, there's an expected lift in the second half of EBITDA as you discussed. And I think Kathy just said sequential sales growth, which is certainly seasonal and normal on the European side. And I guess it sounds like there could be even sequential growth in North America as well. So maybe you can talk us through how much of the incremental EBITDA growth in the back half is from sales growth? And how much is from incremental cost reductions? Or help us just think through those kind of levers?

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

Yes, we had good product and customer mix coming into second quarter, which people continue. Sales growth will have a lot of leverage going forward. So that will improve gross margin. Other things we're doing to convert material and labor into sustainable products improve gross margin by reducing variances and the inefficiencies in our factories from the daily shifting of production plans based on supply chain changes every day. What parts of received on time or a little delayed, it should be further mitigated if you're giving to the team increasing good planning for that or dealing with that. And I think those are the few things, really sales growth was good margin, which gives us leverage on. I can tell you that the spirits is probably a little different by product or plan for generally both of those would be strong contributors.

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

Yes. [Speech Overlap] Really the sales growth that we would see in Q3, Q4 that we're anticipating. And then obviously, the improvement in the supply chain efficiency should help us in the second half of the year as well. Right.

Bob Labick -- CJS Securities -- Analyst

Okay. Super. And then last one for me, I'll get back in queue. But many companies or most companies are suffering from labor constraints. I'm just wondering how that has impacted you in the first half? And how you see that if there's any relief better labor markets ahead? Or how you're looking at that and how that plays into your outlook?

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

Yes. It's definitely been a challenge for us in all our major plant locations for various reasons. We've seen some improvement at the end of second quarter, beginning of third quarter. I think some unemployment benefits that have changed, I think as the labor market gets past the summer months and people get into the fall, we do expect some change. But I don't say it's the chance for employers like Invacare to show that they are great long-term employers, and it's not a job shop gig market fo rus. We look forward to offering people a great long-term engaged career opportunity at all levels. So we think we'll have less impact of labor over time.

Bob Labick -- CJS Securities -- Analyst

Super, Thanks, Very much.

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

Thank you, bob.

Operator

Thank you very much. We now move on to our next question over the phone, which comes from Mike Matson from Nano. Please go ahead.

Joseph -- Nano -- Analyst

Hi guys. This is Joseph on for Mike. I guess, first off, if you guys can maybe comment on the free cash flow guidance. are you in it? And do you expect any working capital increases to reverse in the second half?

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

We definitely do. We've consumed quite a bit of cash in terms of inventory second quarter, real positive results in terms of sales, obviously, which increased accounts receivable $20 million, which we'll expect to return to cash third quarter, a little bit more incremental inventory to help us with our supply chain. The network at I think pretty clearly, you've got to generate a lot of cash, which we expect to be with respect to growth with a lot of good working capital actions underway Kathy, can you give a more detailed answer?

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

Yes. I think we mentioned at the end of the second quarter, we had increased accounts receivable from sales growth in Q2 of roughly $20 million leased on our average DSOs that should turn the cash into Q3 as well. We have invested in inventory. We've spoken about that on previous calls. Historically, we do invest in inventory in the first half of the year, but we also invested in additional inventory given the supply chain challenges. We would anticipate a reduction inventory, probably more so in the fourth quarter at the year-end than the third quarter. But clearly, cash flow should benefit from improvements in the AR balances as well as the inventory balances as for the remainder of the year.

Joseph -- Nano -- Analyst

Okay. Okay. Great. You guys have already mentioned the increase in inventory. Does this necessarily mean you're out of the woods with regarding the supply chain issues? I guess is it risk that like new component shortages because of the capacity in the second half? And then maybe touching on some recent news we've heard from other companies reporting concerning the semiconductor shortage and their ability push out products. Is this going to affect your guys' supply at all? Thanks.

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

Sure. So I think we expect the [Indecipherable] -- supply chain to improve only in the sense that it stabilizes and this continues to be disruptive. So what's difficult for us is this disruptions are less predictive. But we're pretty good at predicting where the disruptions are team a lot of people supporting our operations. They're doing a fantastic job dealing with the reality that we predict will persist to probably April or May next year. But that's OK because we inventory to take us through the sales growth period that we have typically now in the second and third quarter with net a month where we especially have a lot of mobility in new products and getting ready for the end of the year. That's a great program. So I think that will be OK new shortages in the second half, we see new shortages every day, we end up resolving them within a few days, and then there's the next kind of thing that happens, it's a new way of working. As far as semiconductor shortages, we have, like everyone, challenges with adhesive electronic components, but nothing in the order that you read about in the automobile industry or something which has a heavy impact for long durations on big product families for us. It's just another component in the short term. So it shouldn't be any big impact to semiconductors.

Joseph -- Nano -- Analyst

Okay. Great. That's super helpful. And then maybe if I could just leave in one more concerning long-term organic revenue growth at this point. You guys feel confident that you can sustain low to mid-single-digit growth in 2022 and beyond that?

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

Well, we really haven't gotten to long-term guidance, but I'd say the market certainly supports that kind of growth. We have great products that allow us to engage with sales teams and customers interest with customers. We're doing things to get friction out of our -- our interactions with customers to do IT systems and customer self-service. So we definitely think we can support that or above market growth rate in revenue in the long term, but I don't take that as specific guidance yet. We'll be out with guidance, I think, around the end of the year.

Joseph -- Nano -- Analyst

Sure, Thank you guys. Much appreciated.

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

Thanks, Joseph.

Operator

[Operator Instructions] We'll now move on to our next question on the phone, which comes from Matthew Mishan from KeyBanc. Please go ahead.

Brett Fishbin -- KeyBanc -- Analyst

Hey guys. This is Brett Fishbin for Matt. Thanks for taking my question. I just wanted to follow up on margins. On margins, you mentioned the 80% on the gross margin side was attributable to the supply chain disruption. So I just wanted to get a little bit of a sense what's assumed in your guidance around the continued impact into the second half? Conducting actions can offset those factors? And then just as a follow-up, what's or reasonable gross margin range to assume for the second half that can enable you to achieve the full year EBITDA guidance? Thank you.

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

I don't know if after you give specific guidance on gross margin, we can work toward that answer. A big thing we've got to work on in the it seems with even just a little bit more visibility with the day-to-day receipt of products and components are going to be so that our operations can start the day with the staffing for the planned production for the day. There was a great article in the Wall Street Journal maybe a month ago that talked about a company in a different industry that's doing probably what a lot of industrial companies are instead of starting the day with the plan that you've had for a long time, he started day with an operations plan based on the parts that have been received or are available that they actually kind of a backward way of us, which a lot of companies and lots of industries are doing to make success happen these days. So for us, it's getting just a little bit more visibility and a bit more inventory like we purchased, so that we can get back to more normal orderly production planning and protection data today.

That's going to be a big driver to reduce operating variances that were to be impacted on gross margin this quarter. What we'll see as maybe was previously answered, the balance of the year with strong sales growth is going to give us good leverage in operations plus backing off variances with better planning and continued good mix with new products and customer engagements with the right products and the right margin mix going through our factories for the balance of the year. We continue to expect component and commodity prices to be kind of in the neighborhood where they are now, so we don't expect a lot of change there. you see those being stabilized. I think that leads us to the end of the year plan that builds up the guidance. I don't know, Kath, do you want to add to that?

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

Yes. The reference to the 80% really is in relation the increased cost that we saw that we do believe are temporary in nature in just managing the efficiency of our operations given the timing of on inventory in the supply chain would arrive at our various locations. And so we're very focused and reducing that negative impact for the second half of the year, and we should see an improvement over where we were in the second quarter, but to the Matt's point, obviously, with revenue growth, will come leverage of our cost structure and as well growth in the mobility and seating inside of the house, we should see favorable sales mix in the second half of the year as well.

Brett Fishbin -- KeyBanc -- Analyst

All right. I appreciate that. And then one more for me. Can you just provide a little bit more color on how much of the expected revenue growth this year is being driven by product launches? And following up, are there any sort of pin you call out contributors so been growth and your net outlook?

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

Tough to say. We do have a good proportion of revenue that is with new products. You called that out specifically a bit different by country and market based on what products are launching companies and how reimbursed is great different end markets, which highlights certain products for others. I would say we're looking forward to the respiratory product, helping buoy the rest of the ticket pandemic demand wanes over time. That will happen at some point, too much of that yet. We have a very deep product line in mobility and seating with power add-ons that are doing really well. New power wheelchairs launch power wheelchairs that have great features and annual wheelchairs, our mobility in seating segment. We've seen great customers in globally all those products are rolling out globally. On the lifestyle products, we have a huge catalog new products to numerous dimension in their specific by market, but we think generally our products should continue to have good growth. So when you look at really every product category is going to be seen by new product development and launches that occurred in the last 18 months, and we have a sustained pipeline of sales R&D of incredibly productive R&D where we can keep that going.

Brett Fishbin -- KeyBanc -- Analyst

Well appreciate it. Thank you.

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

Thank you.

Operator

Just to confirm, there are no further questions over the phone even at this time. So I would like to turn the call back over to our speakers and hosts for any additional closing remarks.

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

Yes. Thank you, Simon, and thanks to everyone who tuned in this morning for our call and Q&A. Kathy and I are available for any follow up questions which lowest quarter. thanks and have a goo day.

Operator

[Operator Closing Remarks]

Duration: 32 minutes

Call participants:

Lois Lee -- Director, Treasury, Investor Relations And Corp. Comm.

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

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

Bob Labick -- CJS Securities -- Analyst

Joseph -- Nano -- Analyst

Brett Fishbin -- KeyBanc -- Analyst

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