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Text: Today we will be reviewing our fourth quarter and full year 2020 financial results and providing investors with an update on our transformation.
Further information can be found in our SEC filings.
Let's begin on Slide 3.
We started 2020 enthusiastic for a strong year of commercial execution, launching new products and continuing to simplify our business.
I'm pleased that despite the unforeseen pandemic challenges, we still managed to do all of those things and achieved remarkable results.
For the full year, we delivered higher profitability at lower net sales, while expanding gross margins and reducing SG&A expense.
We also achieve breakeven cash flow by prudently managing working capital with a special emphasis on reducing inventory.
At the same time, we strengthened our financial flexibility by retiring debt and extending the maturity of a significant portion of convertible notes.
It was another great year of new products.
Our innovation team added great new products expected to drive incremental sales and improved profitability.
We also manage through challenging global supply chain disruptions and took steps to optimize our manufacturing network.
We did this while quickly adapting to a new work environment to safety measures for our associates and creative ways to engage our customers.
Our ability to conduct virtual training and support our customer's non-contact clinical assessment and the unique ability of many of our products to perform remote programing and diagnostics really put us ahead.
For the best of best of these to widen our competitive advantage in the future.
2020 has made our business stronger.
Invacare participates in durable, healthy markets and serves a persistent need for its products with a tremendous opportunity to grow by commercializing new products and servicing pent-up demand for purchases.
We continue to simplify the business, so we can better serve our customers and make transactions easier.
At the same time, we have a great team of people, working to drive efficiency and financial performance.
After strong results in a challenging 2020, I have even more confidence about the bright future ahead of us.
On Slide 4, you'll see the fourth quarter, we delivered stronger operating income with a substantial increase in free cash flow.
This was the result of overall good sales performance, cost containment measures and less restructuring in the period.
As guided, in the fourth quarter, we achieved improvement in sequential consolidated net sales of 5.7%, in constant currency sequential net sales increased by 4.2%, driven by continued strength in respiratory products, increased sales of lifestyle products and growth in North America mobility and seating.
These results were consistent with our expectations about the lessening of pandemic restrictions in the periods.
Compared to prior year, operating income increased by $5 million and free cash flow increased by nearly $12 million.
I'm pleased with the continued progress in the business and the improved financial results achieved during the quarter.
Turning to Slide 5, with fourth quarter, adding to the strong results from the three prior quarters, full-year operating income increased by $21.7 million and adjusted EBITDA grew by over 11% to nearly $32 million.
During the year we launched new products, improved gross profit margin and effectively managed SG&A expense to achieve these results.
Importantly, after years of improvements, North America returned to profitability with more than $17 million increase in operating income and modest growth in constant currency net sales.
As mentioned previously, we generated breakeven free cash flow as a result of prudent working capital management.
I'm pleased with the significant improvement in our key metrics.
This demonstrates our strategic initiatives are working and that we have built a strong business foundation.
As demonstrated on Slide 6, having a full pipeline of compelling new products with meaningful innovation is at the core of our growth strategy.
In 2020, our innovation and commercial efforts continued unabated.
We launched new power wheelchair products in adults and smaller sizes, active manual, passive manual and Bariatric wheelchairs, folding compact power wheelchairs, power add-on beds, lifts and hygiene products.
It was really a great year, adding to our portfolio, which will help us find more ways to engage with clinicians, and help them engage with end users looking for the latest solutions for independence and great healthcare aids.
In 2020, we also introduced the Pico Green product line, the first shower chair made using renewable materials from sustainable products and which eliminates 99% of surface bacteria, particularly maintaining a safer patient environment.
These products come in many varieties and will help us engage with customers to provide better solutions for 24 hours of care.
This is the kind of pipeline we expect to continue in the future.
Also in 2020, we completed the previously announced structural business improvements.
We outsourced all of our IT infrastructure and began deploying our modernized IT system in the first stage in Canada and New Zealand.
We're pleased with the system's new functionality and look forward to using these new systems to improve our customers' experience transacting with us, and to providing our associates with modern tools to simplify their work and improved results.
Additionally, in December, we successfully completed the German plant consolidation, which is anticipated to generate approximately $5 million in annual cost savings, starting in 2021.
In 2021 we'll turn our attention to further optimizing operations and our manufacturing facilities, into working with our logistics partners, which should further improve results.
In summary, 2020 was a good year in both results and from fundamental improvements that will help us grow and improve in the future.
On Slide 7, I'd like to take a brief moment to address how our ESG initiatives support our mission and enhance shareholder value.
At our core, Invacare is a company focused on our mission of inclusion.
After all our products are designed to maximize the person's independence and to help people achieve the best lifestyle and outcome in any setting they choose.
Our business results are what we do every quarter and ESG guides us on how we achieve -- as an employer and community number, it's important for us to align our mission-driven purpose that yields great healthcare solutions for people and to do that in a way that engages all of us that work with us.
Three years ago we began a concerted effort to ensure Invacare is a responsible environmental steward, with employment practices and community outreach that engage with us.
You can see the areas we're focused on to leverage our efforts to reduce waste, consume energy responsibly and engage with social purpose.
Turning to Slide 9, during the fourth quarter, while constant currency net sales decreased compared to the prior year, revenues increased sequentially as healthcare restrictions began to loosen.
During the early days of the pandemic, there was no playbook and now every day we learn how to be more effective in this new environment.
We achieved a higher gross profit margin, both year-over-year and sequentially, despite continued supply chain challenges with the benefit of previous initiatives and product mix.
To offset lower sales, we took actions to reduce SG&A expense and improved operating income by $5 million.
As we will discuss later, some of the reduction in SG&A expense was a result of lower sales and related business activities.
However, of the available actions we implemented, many of them are durable.
That said, as revenue grows back, we expect that selling expenses like commissions will return, but this is a good thing and will allow us to scale against our SG&A expense.
At the end of the year, free cash flow was helped by the increase in third quarter sales that were collected in the fourth quarter.
In addition, our colleagues around the globe were diligent in managing down inventory, which peaked in the second quarter as sales declined faster than fulfillment levels could be reasonably adjusted.
I am pleased with how quickly we were able to adapt.
Turning to Slide 10, while the pandemic had little to no impact on sales in the first quarter, by late March to early April the whole world had gone into a simultaneous and hermetic shutdown, which lasted throughout mid-summer.
Access to healthcare was oftentimes limited to only pandemic related or urgent care, with elective care suspended or delayed.
As a result, consolidated net sales declined significantly in the second quarter and have continued to improve throughout the year, but have not yet returned to pre-pandemic level.
Each of the product lines was impacted differently, which I'll address in more detail on the next slide.
Despite lower revenues, gross profit as a percentage of sales improved by 60 basis points, due to favorable sales mix and prior actions taken to expand margins.
As mentioned previously, we executed both temporary and durable actions to reduce SG&A expense to match the lower sales level.
As a result in 2020, we managed to grow operating income, reversing course from an operating loss in 2019, a significant turnaround in results.
In addition, adjusted EBITDA improved over 11% from 2019 and free cash flow exceeded our expectations.
Turning to Slide 11, as Matt discussed in the previous two quarters, the pandemic had a different impact on each one of our product lines.
Mobility and Seating product sales began to see early signs of recovery as consolidated sequential net sales improved modestly.
North America's sequential sales growth of 3.3%, was more than offset by weakness in Europe as more stringent public health restrictions imposed during the fourth quarter continued to limit access to our customers and end users.
As our products mainly serve chronic conditions, we believe these sales are generally non-perishable and these delayed sales will be fulfilled in 2021.
Our new Mobility and Seating products are beginning to contribute as well, and we expect their contributions in 2021 to help lift the category even higher.
Lifestyle Products grew sequentially, driven by Europe, with strong demand in all product categories, primarily bed and bed related products.
Respiratory, which continue to experience elevated demand globally, increased by over 75% compared to the prior year, and also grew sequentially, driven by sales of stationery oxygen concentrators used for the COVID-19 response.
Global supply chain issues that were almost insurmountable during the second quarter have improved considerably, but still impact our ability to meet the outsized demand.
We continue to experience global demand in excess of our ability to supply, currently impacted by transportation and logistics delays.
Turning to Slide 12, Europe constant currency net sales during the fourth quarter decreased compared to the prior year, as growth in respiratory was more than offset by lower sales of Mobility and Seating and Lifestyle products.
Sequentially, reported net sales increased 10.8%, driven by increases in Lifestyle and Respiratory products.
Europe continues to be impacted by more recent pandemic related measures, which may limit our end users ability or willingness to obtain healthcare, although our customers generally remain open.
As a result of the lower sales both gross profit and operating income declined, and we incurred unfavorable manufacturing variances from the lower volume.
For the full year, although we saw sequential improvement in net sales in both the third and fourth quarter, overall sales were limited by the pandemic.
Historically, the second half of the year is seasonally stronger due to higher sales of Mobility and Seating products, primarily scooters in Europe, which are popular during the warmer months.
Strict health restrictions in many of our key markets dampened sales as our end users had limited opportunity to enjoy being outside or travel freely.
As a result, we saw the same impact on gross profit and operating income for the full year as we did in the fourth quarter.
Turning to Slide 13.
In North America we achieved higher constant currency net sales in both the fourth quarter and the full-year, driven by two primary factors.
First, we saw a tremendous growth in sale of respiratory products primarily stationary oxygen concentrators.
Not only did we see higher unit volumes, we also realized a favorable mix shift toward higher acuity products.
Although, sales increased significantly, fulfilling these orders was not easy.
We had to battle multiple global supply chain challenges early on when our suppliers were closed due to not being deemed essential businesses, had difficulties assembling our workforce and inefficiencies driven by the scarcity of transportation and logistics.
While most of these issues have resolved themselves, we feel an impact today.
The second factor is that the individual states in the U.S. never fully shutdown cohesively as the countries in Europe.
As long-term care facilities closed their doors to new residents, we saw a shift toward home healthcare, an area where we have a strong presence.
With improved sales, we were able to expand gross profit, which improved 510 basis points for the quarter and 260 basis points for the full year.
This was largely driven by favorable sales mix and lower freight and material costs.
Importantly, operating income improved by $4 million for the quarter and by $17 million for the year, as we realize the benefit of transformation initiatives, which return the segment to profitability.
I'd like to commend the team on all their hard work, which led to such great results.
Turning to Slide 14, we made great progress in Asia-Pacific, as constant currency net sales improved year-over-year and sequentially.
In the fourth quarter, constant currency net sales increased 16.2%, driven by all product categories with a nearly 36% improvement in mobility and seating sales.
Sequentially, reported net sales increased 11.5%, driven by mobility and seating sales.
Operating loss for all other improved, driven by higher operating profit in the Asia-Pacific business and decreased SG&A expense related to corporate stock compensation expense.
Moving to Slide 15.
As of December 31, 2020, the company had approximately $273 million of total debt and approximately $105 million of cash on its balance sheet.
In 2020, we took proactive steps to improve our financial flexibility by retiring approximately $25 million of convertible notes in 2021.
In addition, we extended the debt maturities to November of 2024 of a significant portion of our convertible notes, which were due in 2021 and 2022.
As a result of these actions, the remaining balance of $1.3 million of the 2021 notes will be settled in cash this month.
As always, we will continue to assess opportunities to further optimize our capital structure.
Let's shift from talking about strong results in 2020 and talk about the future as we provide our outlook for the company's expected performance in 2021.
We now know so much more about operating in a pandemic and we anticipate it's going to have a heavy influence in 2021, both in restricting access to healthcare and affecting supply chain and logistics, much like it did in 2020.
We also have a view on improvements we're going to make in 2021 to make another great year.
On Slide 16, we show guidance with expected operating results for the full year 2021 to consist of the following.
Constant currency net sales growth in the range of 4% to 7%, we're giving a range of revenue, reflecting good growth over 2020 with the range providing for variations in sales by product line and in key markets depending on how the pandemic unfolds.
Given these assumptions, this is expected to result in a 41% improvement in adjusted EBITDA, taking us to $45 million, and free cash flow generation of $5 million.
Based on the healthcare restrictions currently in place, especially severely in Europe, consolidated reported net sales in the first quarter maybe down slightly to mid-single-digit, compared to prior year, which was not impacted by the pandemic.
We're bullish for the full year, expecting a strong uplift in the second half with public health restrictions are lifted.
While, it's impossible to project the exact path of the pandemic in 2021, we remain confident that as weather gets warmer in the Northern Hemisphere, where we do most of our sale, and as people desire to get outside and as vaccines become more widely available, we'll see strong sales growth, driven by new products and pent-up demand from 2020.
As I mentioned earlier, we expect some increase in SG&A expense, primarily to support increased sales, although it should remain below 2019 spending.
Not yet factored into guidance is the anticipated benefit related to improved customer experience and efficiencies from the IT modernization initiative as it's rolled out in North America.
Finally, free cash flow is expected to be lumpy in the quarters, especially in the first half, if we fund seasonal inventory early in the year and payments for 2020 programs like severance from the German plant consolidation and deferred taxes.
Our guidance demonstrates the continued confidence we have in our strategic plan and our ability to drive future growth.
While we could not have predicted the pandemic, the test of the result of our customers, suppliers, associates and the people who rely on our products every day, I am incredibly proud of all we accomplished.
This would not have been possible without the inspired and tireless support of our associates who battled through global supply challenges, found creative ways to engage with our customers and end-users and adapted quickly to a new working environment, all while ensuring the health and safety of our colleagues.
Looking ahead, we have clear objectives with the focus on delivering sales growth and generating gains in our key markets, which we expect will result in significant improvement in profitability and free cash flow.
We're confident the long-term economic potential for Invacare remains strong.
Later this year, we'll provide an update on the timing of our longer-term targets, which we believe will achieve according to our prior and ongoing strategic initiatives as they continue to gain traction and as consequences of the pandemic sub-side.
We will now take questions.

user
sees 2021 constant currency net sales growth in range of 4% to 7%.
sees 2021 adjusted ebitda improvement of 41%, to $45 million.

assistant