Invacare Corporation (NYSE:IVC)
Q1 2016 Earnings Conference Call
April 28, 2016 08:30 AM ET
Lara Mahoney - Senior Director of Corporate Communications and IR
Matthew Monaghan - Chairman, President and CEO
Rob Gudbranson - SVP and CFO
Bob Labick - CJS Securities
Matt Mishan - KeyBanc
Jim Sidoti - Sidoti & Company
Welcome to the Invacare 2016 First Quarter Conference Call. [Operator Instructions]. This conference is being recorded Thursday, April 28th, 2016.
I will now turn the call over to Lara Mahoney, Invacare's Senior Director of Corporate Communications and Investor Relations.
Thank you, Deanna.
Joining me on today's call from Invacare are Matthew Monaghan, Chairman, President and Chief Executive Officer; and Rob Gudbranson, Senior Vice President and Chief Financial Officer.
We will begin the call with the customary Safe Harbor statement that this conference call may include statements regarding anticipated or future developments that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are those that describe future outcomes or expectations that are usually identified by words such as should, could, plan, intend, expect, continue, forecast, believe, and anticipate; and include, for example, any statement made regarding our future results.
Actual results may differ materially as a result of inherent uncertainties and risks, including the risk factors described in our Form 10-K and other filings with the Securities and Exchange Commission and in our earnings release, and we refer you to those risks factors. We may not be able to predict and may have little or no control over the factors or events that may influence our financial results.
On June 2nd, The Company divested its United States medical device rental businesses from long-term care facilities, which were a part of the institutional products group or the IPG segment. The rentals businesses were not deemed discontinued operations for reporting purposes and therefore are included in the results below unless otherwise noted.
On today's call, we will focus on the highlights of the quarter as opposed to covering all the details, which you can read in the earnings release that was issued earlier today. In particular, I would refer investors to the release for the definitions of free cash flow, constant currency net sales, and the adjusted earnings and loss items which will be discussed during the call. You can find the release and access to our SEC filings at www.invacare.com, under the Investor Relations tab.
I will now turn the call over to Matt Monaghan.
Thank you, Lara, and good morning.
I'd like to begin today's call by reviewing the consolidated results for the Company's first quarter ended March 31, 2016. This was the second quarter of really driving the Company to shift to a more clinically complex mix of business. The results show we're already making good progress.
In both the North America HME and Europe segments, net sales of mobility and seating products increased. These products comprise the majority of our clinically complex portfolio. As a result of our efforts and excluding the effects of the divested rentals businesses, gross margin as a percent of net sales increased by one percentage point.
Given our strategic focus away from lower-margin, less differentiated products, along with external market dynamics; and excluding the divested rentals businesses, consolidated constant currency net sales declined 4.8% compared to the first quarter of 2015. Gross margin will continue to be an important measure as we shift our sales focus and drive more efficiency through our system.
In the quarter, constant currency SG&A expense without the divested rentals businesses increased slightly due to changes in employee costs. On a constant currency basis, including the rentals businesses, SG&A decreased $5.1 million or 6.3% compared to the first quarter of last year. This apparent decrease was driven by the sale of the rentals businesses in July 2015, which eliminated $5.7 million of expense.
The Company's interest expense increased approximately $1.2 million to $1.9 million in the first quarter of 2016; compared to $0.7 million in the first quarter last year. The increase was due to the convertible debt issued in the first quarter of 2016 and to the real estate sale leaseback transaction completed in the second quarter of 2015.
Lower net sales, increased warranty expense and higher interest expense led to an adjusted net loss of $0.25 per share in the first quarter of 2016, compared to an adjusted net loss of $0.21 per share last year. On an aggregate basis, the adjusted operating loss was $5.4 million in the first quarter of 2016 compared to an adjusted operating loss of $4.1 million last year.
Free cash flow was negative $39 million in the first quarter this year due to these same factors, along with increases in inventories principally due to lower first quarter sales and to higher accounts receivable balance.
I'll now turn the call over to our CFO, Rob Gudbranson, to discuss the performance of the segment and additional financial results for the quarter.
Thanks, Matt, and good morning.
In the first quarter, constant currency net sales for the European segment increased 2.4%, driven by increases in mobility and seating products, partially offset by decreases in respiratory products.
Earnings before income taxes in the European segment decreased $1.8 million compared to last year. This reduction in earnings was primarily due to unfavorable foreign exchange, unfavorable sales mix, and increased SG&A expense primarily related to employment costs.
In the first quarter, constant currency net sales for the North America HME segment decreased 14.5%, driven by declines in lifestyle and respiratory products, partially offset by increases in mobility and seating products.
Loss before income taxes improved slightly compared to the first quarter last year. This improvement was a result of a stronger gross margin and reductions in SG&A expense, partially offset by lower net sales and higher interest expense.
Excluding the net sales impact of the divested rentals businesses, constant currency net sales for the IPG segment increased 10.1%, driven by interior design products and bed products. Earnings before income taxes improved slightly compared to the first quarter last year, largely due to the absence of the divested rentals business, which had generated a loss before income taxes in the first quarter of 2015. This increase in earnings due to the divested rental businesses was partially offset by a reduced gross margin and increased SG&A expense related to employment costs.
For the first quarter of 2016, Asia Pacific constant currency net sales decreased 2.9% due to the net sales decreases in the Company's subsidiary that produces microprocessor controllers and the Australian distribution business.
For the first quarter, loss before income taxes improved by $0.5 million, compared to the first quarter last year. The decrease in loss before income taxes was largely due to lower SG&A expense and favorable gross margin as a result of favorable foreign currency transactions and manufacturing costs.
During the first quarter 2016, the Company issued $150 million in convertible debt. The Company received approximately $144.1 million in net proceeds, of which $15.6 million was used for related convertible note hedge transactions and $5 million was used to repurchase common shares. As a result, total debt outstanding as of March 31, 2016 was $197.9 million with the adjustments as described in the release.
The Company's cash balances were $144.7 million as of the end of the first quarter. The increase in cash balances was the result of net proceeds received from the issuance of the convertible debt during the first quarter of 2016, partially offset by free cash flow usage in the first quarter.
As of the end of the first quarter, day sales outstanding were 44 days, up from 42 days as of December 31, 2015, and down from 47 days as of March 31, 2015. At the end of the first quarter, inventory turns were 4.5, down from 5 as of December 31, 2015, and 4.8 as of March 31, 2015.
I'll now turn the call back over to Matt for a few closing comments. We can then address questions.
Thank you, Rob.
In 2015, we established our two priorities: building an enterprise-wide quality culture and generating profitable growth. In the first quarter, we continued to build on the progress we shared in our 2015 year-end release.
As previously announced, our independent expert auditor issued its certification report for the third phase of the consent decree in February, indicating the Company's substantial compliance with the FDA's quality system regulations. Similar to the first and second certification processes, the FDA has responded to this report with clarifying questions. When the FDA's questions are satisfactorily answered, we will submit our own written report as required by the terms of the consent decree.
If and when the FDA accepts both of these reports, the agency will re-inspect the impact of facilities. We cannot predict the acceptance of these reports by the FDA, the timing of the inspections or any remaining work that may be needed to meet the FDA's requirements for resuming normal operations in Elyria.
Regardless of what the timing may be, we're continuing to make investments and great strides in quality improvements and shifting the culture. The changes we are making will drive innovation and efficiency and put us on a foundation for sustainable high-quality results. And we're finding, by doing this, we already have greater solutions and new combinations of products from across the Company that meet existing market needs.
We're off to a good start transforming the business and better leveraging the Company's strengths. We will continue to drive improvements in gross margin as we build more clinical parts of our business. That's not to say there won't be headwinds along the way, including external market factors such as national competitive bidding in the United States. But we're putting money to work for greater commercial success to grow our business and bring more efficiency to how we operate.
Invacare is a great platform for growth. We have a good team in place for executing our plans and aligning ourselves with the long-term trends in the industry.
Thank you for your time and attention on today's call. Let's open the phone lines for questions.
Thank you. [Operator Instructions] We'll go first to Bob Labick of CJS Securities.
Good morning, Bob.
Hi, so just wanted to start where you ended there, with the FDA consent decree. I understand, obviously, that the timing is unknowable. But clearly, you're making progress, right? You've reached a milestone and there's more ahead of you.
Can you just talk a little bit about your plans as this progress goes forward in terms of regaining your share? And how has the market changed for custom powered wheelchairs in the last few years as you've been at the low level of production? Has it changed? Are you still - do you still have the superior product? How will you regain your previous share over the next quarters, years, whatever it'll be?
Great questions, Bob. Let me see if I can cover all those parts. So our plans are really already underway. We continue to take the efforts in Elyria very seriously. We are making really good progress. We look forward to continued progress there with the FDA.
But beyond that, we have so many subsidiaries around the world that have products that, alone or in combination with other subsidiary products, really address very well and uniquely the needs of the complex rehabilitation market, which is the market largely served out of the Taylor Street facility.
And that's part of what's driving the gross margin increases is under the newfound commercial success which some of those products that have already been out in the marketplace, maybe not in every market, but we're bringing those combinations around the world.
Things like the ROVI product that we launched last year, the Freedom Solara, which is a passive manual product; the electric motors and augmented mobility products from Alber in Germany, which you can put on other wheeled products.
At the International Seating Symposium this year, we brought together all of our subsidiaries and showed what we can do in a total lineup of therapeutic products. And it was really, really astounding. Completely different, very broad, compared to our competitors in the marketplace. And that's a big change going forward.
How will we take advantage of this along the way and regain our market share is just by doing that, by showing folks that we're more than a consent decree and more than the products in Taylor Street. We have this great portfolio. The things that we're doing with our sales force is to combine our great experts who previously may have had a narrowness of scope. They might've done one product segment or represented mostly one subsidiary and put them in the marketplace well trained in deep clinical understanding of all of the range of products that deal with clinical rehab.
And then, I think in terms of share gain, one of the things we continue to see is strong brand recognition of Invacare throughout the process. One of the things that we're still able to do in selling from Taylor Street is to have these verification of medical needs form signed which require a therapist to identify something that's unique about our product on behalf of the patient that other products can't do.
And we still have a heady business doing that. And the benefit of that is that our commercial organization is out every day with the same clinical leaders across North America having those distinguished differentiating conversations and demonstrating that our products do perform things differently than our competitors.
Competitors are still very strong in the marketplace, but we look forward to that share gain. As population grows and incident rates remain the same, we think there's a greater opportunity in the future for our sales.
Great, thank you for that color. And then, you talked about this a little in your script, but could you talk about the pivot to more complex solutions in North America? How are your customers receiving them and reacting to the shift? And maybe just give us a couple examples of some of the more complex products coming out now and the reception for them?
We've had a number of products that have been launched in the U.S. and outside U.S. markets over the last year. But the ROVI base with the Ultra Low Maxx seating, which is best-in-class, came out last June.
We had the Solara product come out last fall, we have the Freedom P.R.O. CG, which is a great, unique passive manual chair that can also be combined with these powered hubs for single-finger control of an attendant. Really remarkable, despite having potentially a very heavy weight passive passenger in the chair, which is really remarkable for institutional and home healthcare.
And then, earlier this year, we came out with the Alber Twion, which is an active manual chair that is able to be driven by the iPhone when the person is not in the chair. So they could bring their chair over to their bedside or move it away from their bed, or something like that, with the use of their iPhone. Really remarkable, innovative products.
I think when we're out talking to clinicians, the first reaction is an updated understanding that this whole constellation of brands can really be had through the Invacare sales team and that the commercial arrangements are more unified than they've ever been. The sewing together of rebate thresholds that used to be more compartmentalized among subsidiaries are now more accessible when you buy across our portfolio. And that's really remarkable; gives us a much better standing with clinicians when we realize that our sales team can come in and really be a much broader part of the therapeutic pathway that they select for their patients. All been very good.
Okay, great. And then, maybe one last one for me, if you don't mind. The European business has done very well on an organic basis. Obviously, there's been some currency headwinds and stuff. But the business itself, I think, has done very well.
Can you talk about the similarities and differences between the North American business and the European business, and if the opportunity is for North America to eventually look more like Europe and have the strong organic growth and the nice margins? Or how do you think about North America in terms of its path to recovery? And how similar or different is it from the European business?
Good question. So we look at Europe as, in composite, very similar to North America. Each market is very different country-by-country. But there are some groups of countries, when you consider in whole, being very similar to North America.
First of all, the size of the business, roughly 47% of our sales recent historically has been in Europe and 49% in North America. So size-wise, we're talking about something that's relatively comparable.
When you look at the Nordic countries in Europe, very federated. They do tenders, national tenders that are one-year or multiyear. So those feel like the VA or a Kaiser kind of contracting process.
When you look at the National Health Service in the UK, they're migrating through their budget pressures to alternative forms of supply. And they have some attributes that are also similar to the VA in terms of doing fleet management. There, the equipment remains the property of NHS. And when a person is done with something like a powered wheelchair, it'll go back to the NHS to be refurbished.
In the UK, we participate in that refurbishment business and the service opportunities that come with that. Those are similar to what our customers are doing in the U.S. to support the VA in terms of providing great care and cost reductions for the provision of healthcare. So that's similar.
And then, when I think about France, Germany, Italy and some of the other countries, there's a one-tier or two-tier distribution system that represents really Medicare, Medicaid and private-pay in composite.
So when I look at our team across North America, it really represents very good management of unfettered access to our complete portfolio. And we show how we can modulate the delivery of care and remain very current with our offering. We can grow sales, as you've observed. We make good margin there. And to me, that really is the snapshot of what North America should be doing in the future.
HI, Bob. The only thing I'd add to that, just for benefits of investors who might be newer to the call, just in terms of looking back, I've got 2012, 2013, 2014 and 2015 and first quarter 2016. In every one of those quarters, Europe has had organic sales or a constant currency sales growth.
So again, I would confirm what Matt said. I think with the right people and the right team and the right access to products in North America, there's really no reason why we can't show that kind of performance in terms of our ability to grow the top line on a constant currency basis.
And those markets are just as competitive as in North America. We have good, strong competitors in Europe. And the payers are very judicious in their use of healthcare dollars, which is what you'd expect. So that tees us up well for, if we're successful there, being able to be successful elsewhere in the solutions we provide.
Great. Thanks very much.
Thank you. And we'll go to Matt Mishan of KeyBanc.
Good morning. Thanks for taking the questions.
First, this is maybe a multipart question, and I kind of hope it all comes together in the end and sounds intelligent. I think your business is very difficult to assess right now because of all the moving pieces. And when you look at the headline number, especially in North America HME, and you see that minus 15% decline. It's a bit surprising how large it is, especially given the easier comps and difficult environment that it's been for a significant period of time.
But on the same token, what's really impressive is you see the North America HME [EBIT] on that 15% decline relatively flat on a year-over-year basis. So first, I was hoping you could kind of go through some of the moving pieces of the sales decline. Whether, it would be the impact of national competitive bidding in the rural rollout, the rationalization of some of the product portfolio, and then the improvement in core products. And maybe if you can quantify some of those.
And also, in the context of the North America HME, EBIT staying flay, talk a little bit about how you manage to do that in a minus 15% decline.
A series of good questions. I took a few notes here. I'll try to hit all those. But if I miss them, we can come back and re-ask.
Everyone needs to really look at Invacare and think about it as a turnaround. So what do you do in a turnaround? You understand what are the strengths and weaknesses of a company, you try to understand the market dynamics from now going into the future that are going to be present over a 3 to 5 year window during which that same transformation is going to take place. And then, you try to line up resources to do more of the things you're good at and less of the things you're not so good at, or that don't align as well as lucrative areas of growth in the marketplace, and then execute with clarity. And I really think we're doing a good job of that.
We've identified areas of the marketplace that fit with Invacare's strengths. Invacare is not a high-volume low-cost supplier of undifferentiated products. We have a very strong legacy of putting engineers and innovators to work, making clinically differentiated results-oriented products that really should be appreciated by therapists, patients, end users and consumers around the world for doing something different.
And in a world where healthcare dollars are ever more scarce, we're in a really strong position to stand up and say our products do something better either total cost to serve for a fleet manager, or better outcomes and more usability for somebody who's looking at the stark clinical benefits.
So when we look at the spectrum of products that we've provided historically, the Company has had one of the broadest portfolios in the industry. And historically, that's been a really strong selling point to go out into the marketplace and say we can do everything from crutches and canes to very complex powered wheelchairs, as an example of a range.
In the future, there's less room for margin and product differentiation in the basic Aids for Daily Living. And there's more access of our customers to alternative forms of supply from places like the Far East, where basic Aids for Daily Living are readily available. And when people are measuring what they can get against the stark declining reimbursement, gross margins are going to get pinched further and further.
And we have some big players in the market who are looking to bring some of those products into new retail channels, like big box retailers. Because they want to entice people to come into their big box and do their pharmacy business or other lucrative disposables businesses, which we don't have.
So when we look at our portfolio, we clearly want to understand activity-based value-added assessment. And we look at our great sales team, and we say, if we make them more clinically oriented, we put the patient at the center of everything we do, we understand what drives our customers' choices between our products and other products; then we can really deploy the sales force to do more with the same kinds of effort. And that is clinically complex products. That's where our products shine, that's where our salespeople shine, and that's where we can really have a conversation about why our products do something different.
So when you think about those things and its being a turnaround, we're going to shuffle things over and really do things more in the clinically complex space: powered wheelchairs, therapeutic support services, safe patient handling, lots of things for residential operators, which is why you see that business growing so much. And despite having lower sales in certain areas, our EBIT can be flat or even better. Gross margin is up, as we've discussed. And there is a [strength]-to-greatness story that's the front part of this turnaround.
So I'm looking at shifting the commercial end of our business. So you see the gross margin improve. You see effectiveness improve. We're going to take investments in commercial success, so that's more salespeople, more demonstration units to make salespeople effective. Salespeople need vehicles to move around, and they need good training, so that we're great partners for our customers and clinicians around the world.
So we're going to have better gross margin. We're going to be investing in things that show up in the SG&A for a while. And then, we have investments in a strong pipeline of technically great, clinically differentiated products that we will continue to come out.
So that's why we understand that this market is going to change, and we're going to be aligned to that kind of difference gross margin up, SG&A tight for a little while. It takes a while for the commercial team to become accretive, 6 to 12 months, let's say. Before that really gets traction. And then, as we've discussed in other calls, this clinically complex area has a relatively long cash cycle. So working capital is going to grow as we do that, too.
Hey, Matt, I'd just add two other points quickly. One would be, even though we don't give specific levels for the increase in sales for the various segments, mobility and seating, lifestyle, respiratory. I would point out to you that both Europe and North America had very good increases in both.
And I think that's a good sign, one, that Europe continues to show growth at the same time that North America, still with the CD in place, is able to show good growth. So we're not limited by the CD in terms of other things we can do; we're limited in terms of Taylor Street. But that team is delivering. So again, without giving a specific number, both of them are showing nice growth in that category.
The other piece I just give you, is a more numeric point, is that basically without going into all the detail, the increase in interest cost hits North America HME. So when you really look at that earnings before tax, it's flat. But then you got to take all that interest, too. So again, gross margin is really improved.
So just going through my checklist manually which is NCB you asked about. I think NCB is a great conversation starter this year for businesses in North America, because there isn't anybody who's historically been in those lines of business that doesn't have to ask the fundamental question about how they're going to improve operations going forward. And we're really well suited to have those conversations, non-delivery oxygen, the durability of our products.
A kneejerk reaction is to say… I need a lower-cost product. We get those requests very frequently. But the conversation is really lower cost of total ownership of a product. And any product that is a fleet product, where they need to have cleanability, reusability, serviceability, is where we shine very brightly. Because our products are incredibly durable, and we have that great reputation to build on.
So NCB is going to generate a lot of opportunities for commercial engagement. We're going to have some lumpiness in the business, I think, as people are hesitating a little bit on their normal steady purchases, deciding risk of the future of their business, whether they're going to take cash and, instead of buying new products from us, maybe buy the consolidation of a competitor of theirs and put their assets to use for a little while. Bad debt or credit risk is obviously something we look at. We've talked about that before. So that's a potential consequence of NCB. But we have a good track record of managing credit risk through the process.
And there are two major milestones worth noting for competitive bidding on July 1st. Both the round two re-compete will go into play, that's the 91 MSAs that were originally impacted a few years ago. And the 50% reduction, the remaining 50% reduction of the rural rollout will also be applied. So this will be one of the first times that the entire country, except for those nine MSAs, are impacted by another hit on reduction.
Okay, got it. I think between the three of you, you definitely answered the question.
Just a follow-up to that, as you look at your North America HME segment, Matt, what percentage of sales kind of meets your definition of clinically complex products?
Well, that is a good question. So the model is interesting, because there are three ways to go at it. There's the head-on clinically complex. That's where we're out in the marketplace selling a complex powered wheelchair, for example. There is the residential facility, where we're selling a lot of clinically complex products on a B2B basis. Even that residential facility draws through some of the Aids for Daily Living. So there's a correlation to some of that.
The retail market of Aids for Daily Living is one of the areas that's under most pressure, because there are so many competitors out there right now with channels of trade that are bringing gross margins down.
So I would look at Europe as probably a starting point for an overall mix of what… if you're trying to build down to EBITDA, what that looks like. And then I think beyond that, there are lots of interesting areas where we can grow clinically complex things even beyond.
So we're not giving guidance yet, and talking about what that mix can ultimately be. But we think there's a lot of expansion in that area.
Okay, got it. And then, last one for me. On the free cash flow, the first quarter is obviously a seasonally weak quarter. But I think you came in a little bit lower than I would've thought. Can you give some incremental color around the free cash flow performance in the quarter, in the context of some of the improvements you actually made last year, versus maybe what happened in the quarter?
I think the bridge… I'll give you the schematic bridge, and then Rob can give the more detailed commentary.
Going from… if we do sequential, our DSO went up a little bit, but it wasn't a wild snapback like we had really crushed it at year end artificially for a bounce-back. We're still practicing good collections and good management of payables.
Inventory did come back as a natural cycle. And then there's a lag between declining sales in the basic Aids for Daily Living business and where inventory is. So we'll continue to bring inventory down. But that doesn't go down quite as quickly as sales do. That was probably the biggest change on inventory.
Receivables went up a little bit. We're going to continue to have working capital pressure because of the long cash cycle on the complex business. We had some timing changes in the bonus payments and the employee costs that in previous years may've happened more in the second quarter than they did this year.
Those are the three constituents that I really see. But Rob, why don't you give the finer points there?
Sure. I did think that you hit some of the key ones right there. I'd really emphasize that even though the DSOs went up from 42 to 44 from year end to the end of the first quarter, were still dramatically better than the 47 at the end of first quarter 2015.
So again, I think we're still performing very well. I think we're very clear on the fourth quarter release. 42 at year end was really a historical low. And we didn't expect to stay down at that level. So that popped AR a little bit. So you can see, when we get out to the free cash flow in the Q, might have $7 million in AR.
Inventory, as Matt mentioned, was a little bit of a drain. I think the biggest issue there was forecasting. I think we did not forecast to be down 14.5% of the North America HME and on organic basis in order to be down 4.8%. So we did have some inventory probably particularly in the lifestyles and respiratory area that we'd not planned on having. So that might be pushing $9 million, $10 million.
The loss itself on a GAAP basis was about $8.6 million. And then on accrued we had some timing in terms of some payments, both externally and internally. That was probably in excess ballpark of $12 million.
So if you take that $7 million in AR, say, $10 million on inventory, a loss of $8.6 million on the GAAP basis, and the movement on the accruals for about $12 million, that gets you to the $39 million, which you're right, Matt, it's higher in prior year.
Always hard to compare first quarter cash flow versus first quarter cash flow in different quarters. But I think the big drivers would be a combination of inventories. So if it were $24 million last year, got about $7 million more of a drain on inventory. And because we're not buying as aggressively given some of the sales decline, probably had about $6 million at AP. And again, that would bridge you from the $24 million to the $39 million again.
So either way you look at it, sort of just how we did in the quarter, or trying to bridge to prior year's first quarter in terms of change, I think the logic is there. Obviously, it's something will continue to work hard on. But $39 million was the result for this quarter.
Thank you very much. I'll jump back in the queue.
All right. Thanks, Matt.
Thank you. [Operator Instructions] We'll go next to Jim Sidoti of Sidoti & Company.
Good morning. Can you hear me?
Yes, Jim. Good morning.
Alright. Just a couple quick questions on timing. First, with the FDA, can you just describe how the process works at this point with questions? Is there a clock that starts when you respond to them, and they have to get back to you within a certain amount of time? Or is it really up to them to decide when to get back to you on the questions or on the responses to the questions that you submitted?
Yes, the FDA has done a good job in providing detailed timely questions, as we would hope and expect. We are in the process of answering those questions. It is not… there's no clock in terms of when the FDA has to make a decision on accepting our report. It's really up to us to do a diligent job and satisfactorily answer their questions. And once that happens, then we'll submit our own company's report.
And then, there is a clock which gives some timing for when the next step in the process would start. And that includes the re-audit of the facility here. And then beyond that, there is no clock on how long an audit could take, or what happens as a consequence of that audit.
Alright. And then, in terms of the transitioning sales focus in products that you've talked about on the call. How long do you expect it to take before you get Invacare to the company that you want it to be? Is that a four-quarter process, or is that more like a 2 or 3 year process?
Yes, I think it's a combination. There's a shift, and then growth. So the shift will take many quarters to let down the parts of the business where we don't have a common ground with customers in our costs of doing business, where we can make a reasonable margin to return to shareholders.
And that'll take some time, and get those same resources to really get gross margin where we want and hit on all cylinders in terms of the mix shift. And then the question is going to be, once we've got the right mix, how do we grow at that same ratio going forward. So there are probably many quarters of the shift. And then there's a long-term growth of the Company, where we'll look more in composite, like that mix of business.
And I think to me, this is a long-term turnaround. We're going to see short-term results. So we're looking at that every quarter. I was pleased at the four quarter that we showed gross margin improvement and cash flow generation. I'm pleased the second quarter of this turnaround, I'll call it more gross margin improvement, good investment opportunities. And that's what I want to see.
The thesis that we have on mix shift and growth is demonstrated at the gross margin line. Below gross margin line is where we demonstrate as a management team that we can effectively grow modulating, bringing in good quality talent, putting good capital to use on an ROIC basis, to get the mix shift right; and then managing cash as best we can to do that. And cash was a constraint in the past due to commercial changes all the way down the income statement. Cash is going to continue to be managed closely by us, because that's one of the key factors in our growth.
So that'll continue to work. It's really looking at the gross margin line to make sure that the thesis is working. And the thesis is already demonstrating to work. And then below that is how we manage the scaling up of the mix shift in growth.
And then, just to follow up on cash. Rob, you had some pretty impressive increases in free cash flow in 2015 as we went from the March quarter through the December quarter. Do you expect this year to play out pretty much the same way?
Jim, at this point, similar to last year, we really won't give guidance. As Matt said, we're going to work hard to make sure there has been the cash that we have on the balance sheet as carefully and for the right projects. But I would also say, as part of transformation, we're going to be making investments.
The first half of the year is typically cash-consumptive. So that's probably a seasonal pattern that'll continue.
Understood. Thank you.
Yes. Thanks, Jim.
Alright. Well, thank you for everybody participating today. We really appreciate your interest and attention to the Company. It's a great platform for growth. I feel strong about our strategy and aligning ourselves with the most interesting parts of the area that fit with the Company's strengths where we can add value and generate returns for shareholders over the long term. We look forward to demonstrating that in future periods.
We're available for calls. Thank you.
Thank you for your participation. That does conclude today's conference. You may now disconnect.
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