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Text: Today we will be reviewing our second quarter 2020 financial results, providing investors with an update on our transformation and our response to the COVID-19 pandemic.
Further information can be found in our SEC filings.
We'll begin on slide 3.
First, I'd like to start today's call by expressing my gratitude for all our associates, who remain so committed keeping our workplace safe and productive in these uncertain times.
As a company whose central focus is to make life's experiences possible, their hard work, creativity and dedication has been inspiring.
Invacare's mission is built on the tenets of integrity leadership accountability and helping everyone be part of an inclusive culture around the world.
We benefit as a company from the diversity of our team, differences of individuals, and the inspiring differences of people who rely on our products in their daily life.
We're pleased with our performance in the second quarter, achieving our 11th consecutive quarter of year-over-year improvement in adjusted EBITDA, as well as sequential improvement in adjusted EBITDA for the first quarter.
We effectively shed costs, but managed cash to offset lower sales.
During the quarter, we also overcame tremendous supply chain challenges, primarily related to our respiratory products, which limited our ability to meet the extremely high demand for these products, which are used for pandemic related care.
Turning to slide 4; we've established a strong track record of enhancing profitability.
This quarter, delivering an 84% improvement in adjusted EBITDA.
Profitability grew, as a result of stronger gross margin from favorable sales mix, cost savings from continuous improvement initiatives, and reduced SG&A expense.
I'm pleased with our strong performance in this challenging environment, which highlights the value of changes, we continue to make.
On slide 5; we saw two distinct patterns driving demand, as a result of the pandemic.
Beginning in late first quarter, we saw strong demand in our respiratory category for both stationary and portable oxygen concentrator.
That elevated demand continues today.
We had a smaller peak in demand for bed systems in our lifestyles category.
At this point for the most part, that peak in bed demand has passed, the timing of the return to more normal sales rates and mix for these product groups are still to be determined, based on the course that the pandemic takes from here.
In Mobility and Seating, the good momentum we had in first quarter begin to slow in the early parts of second quarter, as public health restriction limited access to clinicians for custom fitting, which reduced sales.
Looking ahead, we see encouraging signs that demand for Mobility and Seating products are starting to recover, as third quarter quote and order rates are improving over second quarter run rate.
In summary, we believe the second quarter will be the low point for sales in the year, as it coincided with the most restrictive phases of the global lockdown.
Based on reasonable assumptions around the loosening of public health restriction, and when needing to access the healthcare facilities, we anticipate sales will begin to normalize over the next two to three quarters.
We're confident that our diverse product portfolio, geographic coverage, continuous improvement initiatives and balance sheet will enable us to manage the business through the pandemic and accelerate our return to growth.
Turning to slide 6; second quarter results show that our transformation is working.
Importantly, North America returns to profitability and generated $4.8 million in operating income in an unprecedentedly tough market.
As a reminder, the North American segment has been undergoing in multiyear transformation, after the impact of national competitive bidding and sales restrictions related to the FDA Consent Decree, Craig, which combines with significantly reduced sales and profitability, starting nearly a decade ago.
In terms of our business optimization plans, we continue to make good progress on our IT modernization program in North America and plant consolidation in Germany, both of which are expected to drive significant cost savings in 2021.
As new products are key drivers of sales growth, it's important to have a vibrant R&D pipeline, and we do.
I'm proud of the team staying on track to develop and launch innovative new products at the same pace, in keeping to the pre-pandemic schedule, which highlights our R&D strength.
Over the past few quarters, we have launched three major power wheelchairs, all of which have achieved steady growth in their short time in the market.
This quarter, we launched another.
The MPS Mini Maxx wheelchair with standing capabilities for small drivers, which is eligible for full reimbursement within the U.S. Group-III category.
Our Adaptive Switch Labs division, which produces sophisticated alternative controls for wheelchair drivers with highly unique need, launched a great new head array.
And in July, in North America, we launched the SMOOV one, a terrific power add-on for manual wheelchairs, which has already achieved great success in Europe.
All these products, as well as a very full pipeline of innovation in all categories will continue to support growth, wherever people need durable healthcare solution.
During the pandemic, our team has found creative ways to support our customers and to drive sales, by leveraging telepresence technology.
The LiNX wheelchair control system helps us perform contactless wheelchair delivery, and our Assurance program offers a fit guarantee, giving customers the confidence to choose Invacare power wheelchairs, when clinical visits are restricted.
In Europe, we upgraded our online presence by launching a digital catalog, a Product Visualizer and a new website.
These are just a few of the ways our commercial team has maintained high customer engagement, while complying with safe public health measures.
I am proud of the continued progress we've made on our transformation, and of our ability to execute under challenging circumstances, a well-developed skill over the past many years.
Our powerful innovation culture is enabling adaptation and growth.
Turning to slide 8; reported net sales decreased 16.8% and constant currency net sales decreased 12.9%, primarily driven by growth in respiratory and more than offset by declines in Mobility and Seating and non-bed lifestyle products.
Gross profit increased 130 basis points to 28.9%, primarily due to favorable product mix and lower material and freight costs, partially offset by unfavorable foreign exchange.
Constant currency SG&A decreased 13.2% or $8.8 million, driven by reduced employment costs and lower commercial expenses.
Lower employment costs included the benefit of reduced work hours and furloughs enabled by government-based programs, to mitigate the impact of the pandemic.
Operating loss improved by $2.3 million, driven by reduced SG&A expenses, partially offset by lower net sales and higher restructuring costs.
Adjusted EBITDA was $6.6 million, up nearly 84% driven by reduced SG&A expense and improved gross profit as a percentage of sales.
The company's free cash flow usage was $1.9 million, an increase of $2.1 million, due to higher capital expenditures.
Turning to slide 9; as Matt discussed, consolidated net sales declined due to public health restrictions that limited access to healthcare professionals and elective care, with the greatest impact on Mobility and Seating.
While Mobility and Seating net sales declined, the company expects sequential growth as quotes and orders in the third quarter have been higher than the run rate achieved in the second quarter of 2020.
Within the lifestyles product category, higher sales of pandemic related bed systems sold in the home care market, were offset by lower sales of other lifestyle products as a result of limited access to healthcare institutions, including long-term care facility.
In respiratory, the company realized higher demand for both stationary and portable oxygen concentrators, with sales limited by global supply chain challenges which dampened manufacturing capacity.
The company expects elevated demand for respiratory products to continue through the third quarter, as possible declines from COVID-19 infections lessen.
Turning to slide 10; during the second quarter, net sales were negatively impacted by strict quarantine measures in the company's key European markets, primarily, the U.K., France and Germany.
As a result, reported net sales in Europe decreased 24%, and constant currency net sales decreased 20.7%, driven by declines in sales in Mobility and Seating and non-bed lifestyle product.
Gross profit decreased 90 basis points, driven by unfavorable product mix.
Operating income decreased $3.3 million, due to reduced gross profit from the lower net sales and unfavorable foreign exchange, partially offset by reduced SG&A expenses and a gain recognized on the sale of a German facility.
Lower SG&A expenses included the benefit of furloughs, and reduced work hours implemented at a majority of the European locations.
Moving to slide 11, the company was not as impactful -- I'm sorry the pandemic was not as impactful in North America, as compared to Europe, as the U.S. was never fully shut down.
Reported net sales decreased 3.3% and constant currency net sales decreased 3%, with growth in respiratory products more than offset by declines in Mobility and Seating and non-bed lifestyle products.
Within Mobility and Seating, higher value power mobility products were resilient, only experiencing a slight decline of 1%.
The North America segment realized a favorable mix shift for its higher acuity products, as end users with more severe needs continue to access healthcare, while less urgent elective care was more often delayed.
Gross profit increased 230 basis points or $2.4 million, driven by favorable product mix and lower operational cost, including reduced material and freight costs as a result of previous transformation initiatives.
The North America segment returned to profitability, with operating income of $4.8 million, an improvement of $6.1 million driven primarily by lower SG&A expenses primarily in employment costs and the benefit of reduced operational costs.
Turning to slide 12; All Other, which comprises the sales in the Asia-Pacific region, increased by 8.1% on a constant currency basis, driven by higher sales of lifestyle and Mobility and Seating products.
Operating loss increased by $300,000, driven by higher corporate SG&A expense, primarily related to equity compensation, partially offset by improved operating income in the Asia-Pacific business, attributable to lower SG&A expense.
Moving to slide 13; as of June 30, 2020, the company had total debt of $319 million, excluding operating lease obligations of $15.9 million, capitalized on the balance sheet.
At the end of the quarter, the company had approximately $104 million of cash on its balance sheet.
The increase was primarily the result of cash borrowed on the company's credit facilities, proceeds from the sale of dynamic controls, and government loan programs, partially offset by cash used to fund operations and cash paid to expense a portion of the convertible debt.
In the second quarter, the company extended the maturity of a significant portion of the 2021 convertible note, and a portion of the 2022 convertible notes, to new maturity date of November '24, with terms substantially similar to the existing 2024 notes.
We are very pleased to have executed this transaction during a turbulent market.
On slide 14, we are reintroducing new full-year guidance for 2020.
Based on the loosening of public health restrictions and renewed access to healthcare facilities, the company anticipates reported net sales in the range of $810 million to $840 million.
Adjusted EBITDA, similar to the prior year in the range of $20 million to $30 million, and free cash flow usage, in line with the prior year in the range of $7 million to $10 million.
This guidance assumes consolidated net sales to improve sequentially, staying below the prior year.
Due to the more stringent quarantine programs in the company's key markets in Europe, net sales are expected to recover slowly, staying below the prior year in the range of mid-teen declines.
In North America, net sales are expected to be below the prior year, in the range of low single digit declines.
Adjusted EBITDA is expected to improve sequentially and for the full year, achieve results similar to 2019, despite lower net sales due to the pandemic.
It was a good quarter in tough times.
We acted decisively to ensure the safety of our associates and customers, while protecting our business against the near-term impact of the pandemic.
This resulted in continued improvement in profitability, and a significant achievement in these unprecedented times.
As I look further out, I'm confident that the actions we've taken to improve our competitiveness, reduce our cost structure, and strengthen our balance sheet, has set the foundation for long-term profitable growth.
It was the direct result of the many quarters of hard work that enabled our team to deliver a strong result this quarter, and we plan to unlock additional value for years to come.
We'll now take questions.

user
sees 2020 reported net sales in range of $810 million to $840 million.
sees 2020 free cash flow usage in line with prior year, in range of $7 million to $10 million.
sees fy 2020 adjusted ebitda similar to prior year, in the range of $27 to $30 million.

assistant