Needham & Co.'s Mike Matson reported positive takeaways from the firm's recent investor meetings with Invacacare management.Photo by Adeolu Eletu on Unsplash
Homecare and long-term care equipment maker Invacare has had a rough go of it in recent years, and tariffs and reimbursement changes in the United States last year didn't make things any easier for the Elyria, Ohio-based company. There does appear to be a light at the end of the tunnel though, and one industry analyst reported positive takeaways from his firm's recent meeting with Invacare management.
"We came away feeling positive about [Invacare's] progress on its turnaround after learning more details about the steps it is taking to deliver upon its 2020 and 4Q20 EBITDA targets," Needham & Co.'s Mike Matson said in an Oct. 10 report.
In July the company went through a round of layoffs and leadership changes as part of its turnaround plan. At the time, it was unclear if the restructuring was substantial enough.
Here are three ways Invacare is turning its business around, based on Matson's report.
1. Invacare Is Streamlining Its IT System
The Needham & Co. medtech analyst reported that Invacare is working to overhaul its IT system in North America that should streamline its current cumbersome ordering systems. The company has six customer service centers in North America that currently employ about 300 people and still receives most of its orders via fax.
The IT system, expected to go live in the second quarter of 2020, is expected to help automate the ordering process and enable customers to make purchases online.
Matson noted that the company has already installed a similar system in Europe where 25% to 30% of orders are now done online. The analyst said Invacare management expects to see savings start in the second half of 2020 and also sees the potential for the new system to improve revenue growth by making IVC easier to do business with.
2. Product Innovation Is Part of Invacare's Growth Strategy
Matson reported that new products should contribute to the company's revenue growth and margins. Ivacare's product cycle is strengthening, and it has launched a number of new products – with more on the way – across different segments, the analyst said.
As an example, Matson noted that the company's lifestyles segment has launched the Invacare Stand Assist, Birdie Evo XPlus patient lift, and Nordbed bed in Europe and plans to launch these products in the U.S. market next year. In the mobility and seating segment, Invacare launched its SMOOV wheelchair power assist in Europe in May and the company has filed for FDA 510(k) clearance, which puts its U.S. launch in late 2019 or 2020. The analyst also pointed to Invacare's respiratory segment, which is developing a redesigned 5-liter and 10-liter stationary oxygen concentrators and a HomeFill system.
"While the new products should drive revenue growth, [Invacare] has also designed them to have lower manufacturing cost," Matson said.
For example, he said, Invacare's current stationary concentrators were designed around 20 years ago when they were priced at about $1,000 compared to $350 today.
"The company is designing its new products to provide attractive margins in the post-competitive bidding pricing environment," Matson said in his report.
Another thing to note regarding Invacare's product mix is that the company reported a decline in North America sales dollars in the mobility and seating business after discontinuing some products in that portfolio. Matthew Mishan, an equity research analyst at KeyBanc Capital Markets, asked Invacare CEO Matt Monaghan about that issue during the company's second-quarter earnings call on Aug. 10.
"My sense is that you guys were building depth in that portfolio for a larger, more specialized sales force," Mishan said during the question and answer portion of the earnings call. "Is that strategy not working?"
Monaghan said the strategy is actually working quite well, and he explained that at the end of last year the company had some legacy manual products it wanted to renovate in order to make space in the portfolio so Invacare discontinued a number of those.
"I don't think we thought we were going to skin our knee with those," Monaghan said. "Turns out in the second quarter, after we had gotten through the inventory of those, it did turn out to be a headwind for us. But we've got great new products in the pipeline, and before too long we'll have an even stronger replacement."
The CEO also talked about the long-term outlook for its respiratory business, which took a hard hit last year from reimbursement changes.
"Externally, as this wave of new metropolitan reimbursement has kind of gone through the marketplace, it will stabilize at new levels. We think that's probably close at hand and we can deal with that positively going forward." Monaghan said. "Internally, this downturn from a year ago in volume has forced us to really look closely at how we spend money, how we develop products, what makes us easy to do business with."
He also pointed out an interesting trend in that despite being down 20% to 30% in the last few quarters, profit from that segment is actually up.
"So we look forward to the market coming back in a more normalized fashion, which we anticipate happens in the second half of this year as fleet owners and operators start planning for the winter flu season."
And of course, he added, the pipeline of new products will help Invacare stay viable in the respiratory segment.
3. Invacare Plans to Take Advantage of Financing Options
Invacare ended the second quarter with $299 million of debt and $90 million of cash. Matson noted in his report that the company has $150 million of convertible debt due in February 2021. The analyst said Invacare management plans to use its cash to repurchase some of the convertible debt and borrow against its undrawn $35 million asset-backed line of credit. Invacare also has $120 million of convertible debt due in 2022, he said.
"Given management’s turnaround plan, they believe that the [company] will be in a position to replace this with a term loan in 2021," Matson reported.