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Invacare Corporation (NYSE:IVC)

Q2 2011 Earnings Call

July 22, 2010 08:30 am ET

Executives

Gerald Blouch, President and COO

Robert Gudbranson, CFO

Analysts

Joshua Zable - Natixis

Jason Rodgers - Great Lakes Review

Operator

Welcome to the Invacare 2010 Second Quarter Earnings Conference Call. I will begin with the customary Safe Harbor Statement that this conference call may include statements regarding anticipated and future developments that are forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995.

Forward-looking statements are those that described future outcomes or expectations that are usually identified by words such as should, could, plan, contain, expect, continue, forecast, belief and anticipate and include for example any statement made regarding the company’s guidance for 2010.

Actual results may differ materially as a result of inherent uncertainties and risks including the risk factors described in the company’s Form 10-K and other filings with the Securities and Exchange Commission and in the company’s earnings release.

The company may not be able to predict and may have little or no control over the factors or events that may influence the financial results.

I would like to turn the call over to Invacare’s Interim Chief Executive Officer, Mr. Jerry Blouch. I would like to remind you that all phone lines have been placed on mute for the first part of the call. After the managements' overview, we will open the call to questions. This conference is being recorded, Thursday, July 22nd, 2010.

I would now like to turn the call over to Mr. Jerry Blouch, Interim Chief Executive Officer. Mr. Blouch, you may begin.

Jerry Blouch

Thank you very much for joining us instantly for today’s call. I have with me Rob Gudbranson, Invacare’s Chief Financial Officer. In the following comments, we are going focus on the highlights of the release as opposed to covering all the details which you can read for yourself in the release after the call.

I would like to refer the inventors to the company’s earnings release to review the definitions of the free cash flow and some of the adjusted earnings items which would be mentioned during the call and you can find the release on our website.

I will now provide an overview of the company’s performance for the second quarter as well as an update on our guidance for 2010. During the quarter, Invacare delivered a strong result in three key areas despite increased commodity costs and pressures from weakening foreign shares extension rates compared to U.S. Dollar.

First, adjusted earning per share for the quarter increased 30% over the same quarter last year to $0.39. This dramatic improvement has attributed principally to net sales growth, gross margin improvement and lowered interest rate expense related to the pay down of debt.

Second, the company reported a returned to organic sales growth in the quarter with a 2.7% increase in organic sales over the second quarter of last year. And finally, Invacare generated a free cash flow of $40 million which was well above the company’s internal estimate for the quarter as well as above the same period last year.

In light of Invacare’s strong second quarter results, the company is raising its guidance for the year on adjusted earnings per share to $1.75 to $1.85 per share and we are increasing our guidance on free cash flow as well to $75 to $85 million.

In addition to strong margin improvement, the company is encouraged that its renewed focus on growth is beginning to show improved organic net sales and moreover, the company paid out approximately $75 million of prior interest rate debt in the quarter, and the first two quarters of 2010 is also making significant contribution.

And the companies expect to continue to benefits from lowered interest expense for the balance of the year. In addition, the company is reviewing other actions including a complete re-financing that could create substantial additional interest saving into 2011. Also, I'm pleased to announce that Mal Mixon who maybe on call today I hope and he was in the office yesterday will return to his position of chairman of the board at the end of the month.

The company does appreciate Jim Boland’s contribution as Interim Chairman and Jim will resume his role as lead director upon Mal’s return. I'll now cover in more detail the consolidated results from the second quarter.

As I said before, adjusted earnings per share were $0.39 for the second quarter of 2010 compared to $0.30 for the second quarter 2009. Adjusted earnings for the quarter were $12.7 million versus $9.6 million for the second quarter last year.

Adjusted earnings before income taxes for the second quarter was $17.2 million compared to $12.7 million for the second quarter last year. The significant improvement in adjusted net earnings for the quarter was primarily driven by net sales growth, improved gross margins and reduced interest expense partially offset by higher selling general and administrative expenses.

The company interest expense in the quarter benefits from the pay down of approximately $75 million of higher interest rate debt during the first two quarters. Net sales for the quarter increased 4.4% to $430.8 million. Of the 4.4%, foreign currency increased net sales by 1.5 percentage points in an acquisition increased net sales but only slightly.

Organic net sales for the quarter increased 2.7% over the same period of last year driven by all segments of the business except the North American HME segment. Gross margins as a percent of sales for the quarter increased by eight tenths of a percent versus last year, second quarter and this is a sequential increase of 1.1% over the first quarter of the year.

Gross product emerges in all segments and I'm pleased to say were favorable compared to last year except for the Invacare Supply Group which declined but only slightly. The overall margin improvement was driven by cost reduction activities, lower warranty expense and this is partially offset by an increased freight costs and commodity costs increases.

Selling, general and administrative expenses increased by 6.6% to $104.4 million in the quarter compared to the second quarter of last year. Of this, foreign currency translation increased SG&A expense by approximately 2 percentage points while small acquisition which we completed in the second quarter increased SG&A by less than a percentage point. Excluding these two items, SG&A expense increased 4% compared to the second quarter of last year primarily due to increase in associate cost and bad debt expense.

With that, I would like to have Rob review the additional financial highlights for the second quarter.

Rob Gudbranson

Please note that all of the comments regarding earnings before income taxes for the segment below exclude restructuring charges in 2009 were relevant. For the quarter ended June 30, 2010, North American HME net sales increased 1.1% versus the same period of last year, driven by increased respiratory and rehab product line sales partially offset by decline in standard product line sales.

Organic net sales for North American HME decreased 0.4% for the quarter. However, excluding the impact of the loss of the six month oxygen concentrator bid from a large customer which occurred the first quarter, organic net sales increased 0.5%.

For the second quarter, North American HME earnings before income tax has decreased $0.2 million primarily as a result of increased freight cost, increase commodity cost and higher bad debt expense.

Net sales for Invacare’s Supply Group during the second quarter increased 6.2% versus the same period last year. The net sales increase was attributable to continued growth in sales to national providers particularly in diabetic and incontinence products.

Earnings before income taxes increased $0.2 million compared to the second quarter of 2009. The benefit from increases in volumes was partially offset by higher freight costs. In the second quarter, net sales for institutional product group increased 6.9% compared to last year.

Earnings before income taxes increased $2.7 million versus last year’s result of increased volume and favorable cost reduction programs and favorable foreign exchange impact on the Canadian dollar.

For the second quarter, European net sales increased 5%. Organic net sales for the quarter increased 3.8%, primarily related to growth in France. From a product perspective, net sales grew primarily in power wheelchairs, power add-ons, concentrators and the HomeFill oxygen concentrator system.

For the second quarter earnings before income taxes increased $1.5 million compared to last year, largely attributable to sales growth in gross margin improvements driven by a favorable product mix and material cost reductions.

This was partially offset by higher freight cost, unfavorable foreign currency transactions related to the U.S. dollar and higher SG&A expense related to associate costs. Asia-Pacific net sales for the second quarter increased 26.6% versus the same period last year. The net sales increase was driven by the company’s New Zealand distribution business and increase demand for product from the company’s subsidiary which produces microprocessor controllers.

Earnings before income taxes were up $2.5 million as compared to last year primarily as a result of increased volumes and the favorable impact of foreign currency. Total debt outstanding including the debt discounted described in the release decreased by $11.8 million to $293.1 million as of June 30, 2010.

Invacare reported $40.2 million of free cash flow in the second quarter of 2010 as compared to $39.6 million of free cash-flow in 2009 second quarter. This year as quarter of free cash-flow far exceed the company’s plan and was driven by increased profitability and improved working capital management, particularly in accounts payable.

I'll now turn the call back over to Jerry to discuss some detailed points regarding Invacare’s updated guidance for 2010. We then can address some questions.

Jerry Blouch

Thanks Rob. During the second quarter as we said before, the company met its internal plans despite increases in commodity costs and the weakening of foreign exchange rates compared to U.S. dollars particularly the Euro and the Pound which were critical to the translation of European profitability.

But as the second quarter ended, the commodity costs end stabilized and in some cases declined as well foreign currency exchange rates started to improve in relative European situations compared to where they were during the second quarter. However, it's important to note that the company will continue to manage through these issues. However, substantial movement in commodities or foreign exchange rates may have a meaningful favorable or unfavorable impact on projected results.

Focusing on reimbursement, there are two updates relative to the United States and Europe. In United States, the centers for Medicaid and Medicare services recently announced the bill rates for first nine metropolitan areas related to National Competitive Bidding. The company anticipated minimal impact as a result of this to our 2010 results.

With regards to Europe, the company is not aware of any legislative plans by local governments to cover reimbursement to help medical equipment due to austerity measures.

In fact, there has been a slightly positive development from France as a potential wheelchair reimbursement issue mentioned in the 2009 release now appears to be delayed to 2011. Any event neither of these are expected to have material impact on the company in 2010.

Finally, as a result of the company’s strong gross margin improvement in the first six months of the year compared to projected and with the progress on our globalization projects as well as reduced interest expense and whether the company has paid down a high interest rate debt leaves the following update on our 2010 guidance.

We are increasing our guidance adjusted earnings per share to $1.75 and $1.85 per share, up from the biggest guidance of a $1.70 to $1.80 and we are increasing our guidance on free cash flow to between to $75 and $85 million, up from previous guidance of $65 to $75 million.

We are maintaining our guidance on the following three items which is unchanged for what we advised previously. We still see our organic net sales growing from between zero to 1%. We’re projecting our adjusted EBITDA between a $145 and $155 million and we are maintaining our guidance on the effected tax rate for adjusted annual earnings at 27%.

Thank you for your attention. At this time, we’ll open up the phone lines and take your question.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Joshua Zable with Natixis.

Joshua Zable - Natixis

And Mal, despite doctor’s orders, you probably listening out there. So we wish you a full speedy recovery. But I guess my questions here, just on the clarity here, on the outlook I guess, with the comments about refinancing, just so we understand, obviously, you guys been buying back debt.

So is the raised outlook of function of the interest you saved so far by having already brought back the debt or does it assume that you are going to continue buying back debt? Thanks guys.

Rob Gudbranson

Josh, we just talk about the refinancing first since you mention that. We envision that we will be refinancing sometime in the second half of the year. So we want to make sure to raise that, the guidance does not in any way depend on us during re-financing. So if we don’t need to do it until the beginning at 2011, we won't. Having said that because I think everybody in the call knows we have still outstanding, a high yield debt at nine and three quarter's interest rate.

The balance of that a $146 million. That’s quite an opportunity for the company. So we’ll look at that but I’d also emphasize to you, we have started acquisitions again. We are going to look at both fronts whether we buy debt or direct acquisitions, we are going to have to see what’s the best return for shareholders and pursue it accordingly.

Joshua Zable - Natixis

And then, just on organic growth. Organic growth looked good. Seems like its coming back here a little bit. I know you guys have implemented programs sort of internally to sort of focus more on growth. Can you just kind of talk about maybe the market or is it more indicator thing, just a little bit more color about where the pick up is coming from and then I guess specifically on respiratory.

I know obviously a competitive products out there. Last quarter, you lost a big contract that you might walked away from or what not but maybe talk about that dynamic as well. Thanks.

Jerry Blouch

I think I guess I mentioned the organic sales growth was across the board expect for HME. I think HME was inner as we have Feb and as you mentioned was still is suffering a bit from the loss of one contract.

Aside from that, the business is healthy. I think, the industry tracking are not terribly robust or useful but we are comfortable that we’re even in North America aside from that one account that we are gaining market share. In the U.S. again, the sense of it is that like most organizations, like most, like Wall Street is when they’re uncertainly pulled back, I think the uncertainties surrounding the outcome of the competitive bidding trial or that trial exit that a live fire exercise, for those of you who have been in the military always causes a halt to our other reservation on people to buy.

There’s a lot of focus on that. So we think that the domestic market is a little soft at the present time but we feel good about in the aggregate, there’s always segments where you're got ups and downs but we feel very good about overall performance.

And in Europe, this fizzle. I know that the some medical companies have suffered a little shocking precipitators in Europe because ferity problem but thus far, relatively unscathed and we’re making good progress in Europe.

So overall, this situation is healthy there and although the, in the United States seven, hit as well as well as in other parts of the world, the intuitional, the long-term care, the elderly care segment was inflected with anxiety and capital availability and because of the economy problems right now, there was bit in a slow down there but we said, we’ve been seen a recovery in those segments.

So I said, it's more comfortable that in the aggregate of regaining share we’re comfortable that the market are still stable although maybe not at historic growth rates because of the economy but I said, we’re in a healthy space right now.

Rob Gudbranson

I agree. And then Josh, I just add one of the point. Jerry, I think hit them all but just to reemphasize, if you back out that concentrator bit for the quarter, North America was up 0.5%.

So I think the run rate when you really look at is pretty darn good even there in terms of showing at least the movement back to organic from where we were at first quarter. And finally, I just emphasize respiratory despite that loss to that contract which effected us in the second quarter too was up 1.2%.

So I think the team did a real good job in North America and if you step back and really look at six months, I know you have sales but also on profitability, they were up $6.5 million and profitability. So I think we have a good machine there.

Joshua Zable - Natixis

Great. And then, just one follow-up just and Jerry, you’d mentioned it so. Obviously, that opened the room competitive bidding. I guess its very early days; I know it doesn’t impact the business for some time but maybe just in terms of the reaction by the industry as far as kind of what the feedback is in the very early days if there is any just comments would be helpful?

Jerry Blouch

I’d say fair it out and shock in all. There’s a homecare board meeting going on as we speak right now. There within 48 hours of the announcements the major players in the industry association and large providers as well as manufactures got together in that talk us on the direction in which ranged from let it crash and burn to buy our way out of it is one of the case in the trials program a couple of years ago. I don’t think is a consensus right now on the parts of the industrial take.

I think that will probably hopefully, come together, hopefully come together this week in Chicago but in any event, I we’re in a general sense, it was not even the government anticipated that the debt of the average reduction. I think Mr. Burns of Lincare has summarized it very well.

He did the, there is the flaws of the process and incurred among other things. And one of the key things as you need to get people who clearly did low and hopes that the average so that they get up there and then the average will though you can think on a live on the average.

So its there’s we can spend two hours talking about the flaws in the process. I think that many other things that CMS was criticized for in the first round have not been addressed and not been corrected and I think we are going to I don’t know if the industry can afford the personal thing that can afford to take in across the board we cut.

And we’re not sure that the rest of the industry who didn’t participate the business wants to pay for the folly of a handful of people who want process but I don’t its not going to be material. I can’t, my speculation on which direction it’ll go and be particularly useful but I think that its going to be an interesting six months and hopefully, the government will find a more constructive way to achieve what the trend achieved in the future.

Rob Gudbranson

And Josh I agree and the only thing I’d is just to put a little more color just on Invacare particularly. If you are out there and your provider, you got the broadest product line with us, you got the ability to come and get our services to help handle or collecting your co-pay to be more efficient, we’ve got affordable concentrators and homefills for non-delivery. All the things, we can do to help the providers I think we are really very positioned to be the manufacturer choice for the whole industry. So we feel good about where we are obviously that the percentage decline was surprising.

Operator

Your next question is from Jason Rodgers with Great Lakes Review.

Jason Rodgers - Great Lakes Review

Looking at your guidance, I was wondering what the assumptions are as far as commodity costs?

Rob Gudbranson

I’ll just give you an example. We sort of tracked. This is three commodities who probably spend the most time are Hot roll, Cold roll steel and then aluminum. Some of the plastics resins are important. We got lead, copper and other things but really if you say steal and aluminum, you’re picking up our biggest exposures.

And just to give you an example is what we usually referenced on the call, the market in the second quarter for hot rolls steel is about $0.35. And I think most people are started calling for let me re-phrase that. I think the market forecast that we are looking at is about $0.31 for the third quarter.

Now Jason, I will tell you. We have as I think many people know, we have a sort of three months rolling index for our contract. So we do expect a little bit of an increase still as were getting the blend of some of those higher prices we’re seeing in the second quarter but again, I think over the time, putting aside some pain in the third quarter, we start to see in forth quarter, some of the benefit where commodities are right now.

So that kind of our forecast in a high level. Obvious, we put a little bit of range in our guidance to make sure that, if the currencies move a little, or commodities move a little, we’re still going to be within the range that we told the street.

Jason Rodgers - Great Lakes Review

And then looking at the standard products, I guess it was a little bit of pricing pressure. I was wondering if there has been a competitive change in the market or what’s the cause of that?

Rob Gudbranson

I think when we look at some of the personnel care items, it was just been little pressure there and some of these products are very stackable and might see some pressure there in terms of the competitor who really don’t have our broad product line, don’t have our capability to support the customer.

So it’s a matter, I’ll take a couple bucks off a walker. So I know you are thinking dramatic there but we try to give some color on why it was slightly down to meet again. Would have preferred to seen all divisions up but down 1.4% and not exactly initiative that we are worried about today.

Jason Rodgers - Great Lakes Review

And then, is Mal intending to return as CEO or what we just remain as Chairman?

Jerry Blouch

Mal said he’s going to continue his rehab and is returning at the moment as Chairman of the Board again. And Jim Bowen who has been acting Chairman will go back to his role as lead Director. Mal is facing jump back in the near future. We’ll see what the future holds.

Operator

(Operator Instructions). Your next question is from (inaudible).

Unidentified Analyst

Just a follow up question on the refinancing, I think you measured how yield is on the 46 million outstanding. Was any convert brought back or how much of the debt was brought back between the commercial high yield and what was the convert outstanding amount?

Rob Gudbranson

I’ll give you the balance on all the debt just so you have it. $146 million where we are on the high yield that was originally $175 million. And again, we bought this over two quarters. So again, 175 down to 146 on a high yield. The convert is at 89 million right now was originally a 135. So we brought that down at the same time. We have about 50 million drawn on the revolver.

Our revolver is a $150 million. So we are obviously not anywhere near that. And then there is some additional debt capital release, small debt of about 7.9. So you add up those pieces, you should get the $293 million.

Unidentified Analyst

And how much did was brought back was between the commercial high yield in the quarter?

Rob Gudbranson

In the quarter, I had to think about that for a minute. Think we have got that handy but I want to make sure to give you an exact number. So maybe we’ll take the next call and then I’ll just reference that when we pull up the number.

Unidentified Analyst

Okay. One another question. You mentioned there you maybe a completely refinancing or you talk in particular about the huge high yield you tend about both the high yield and the converts or (Multiple Speakers)

Rob Gudbranson

Even if it did well, what we are really focused on is getting a new revolver in place and then we use that to look at whether we potentially would go after either of them. I think the issue becomes February 2011. We do have a call, a hard call on the high yield at 104.875 and that’s something we would take a hard look at.

Yes again, we know what that price would be is 104.875 is the price what our February 2011. We can potentially move earlier but we know that call date and that call press. We’ll reference the other number and that is other question.

Operator

(Operator Instructions) And we do have a follow-up question from the line of Joshua Zable with Natixis.

Joshua Zable - Natixis

Just a quick question on currency here. The outlook rate is particularly impressive in the Phase of kind of currency headwind. I know, I'm sure Rob you, I know you got a lot of questions about it sort of in between the quarters, now the results are out, can you maybe kind of talk about just what your seeing, what your thoughts on currency going forward? How much it hit you guys? So obviously, how much you overcame? Thanks.

Rob Gudbranson

I’ll just answer the question from the earlier caller. I guess the piece that the most useful is that in the first quarter, we bought about $15.8 million of debt. That was only $1 million of higher yield and that we bought, we bought by six months $74.9. So you can quote the numbers out and see where, where the pieces were. In terms of the OpEx impact, I will focus Josh on the second half.

In the second half of the year, we went back and looked at what rates we used to end to the first quarter put together forecast and what rates we use now. I think you all know the Euro and the Pound are the most important pieces probably in all force of three quarters of our European exposure. We have other exposures in Canada in New Zealand and in Australia but not nearly important as Europe.

So if you apply the rates we use in our forecast first quarter to our where we are today, given where the rates are today, we think there’s probably about a anywhere between say $0.6 to $0.8 hit in terms of headwind in the second half of the year.

So it is meaningful but it is not gigantic and obviously with commodities getting a little bit better for us with our performance in the gross margin, we feel very comfortable the one we offset that and then obviously, with $0.5 additional in terms of our guidance and EPS, we can go beyond that.

So we feel pretty good where we are today that we got the right, the right mixture to support that but again answer your specific question, it was approximately $0.60 to $0.80 for the back half of the year for headwinds on the currency and its impact on operating margin, operating profits.

Operator

At this time, there are no further questions. I would now like to turn the conference over back to Mr. Jerry Blouch.

Jerry Blouch

Want to thank you again for your support and I appreciate you joining the call today. Obviously, if you have additional questions, you can contact Laura or Rob or myself if you like at anytime. Thanks again.

Operator

This does conclude today’s Invacare Corporation’s second quarter 2010 earnings conference call. Thank you for your participation. You may now disconnect.

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