Invacare Corporation
Q1 2017 Earnings Call Transcript

Published: 9 May 2017

[Operator:]

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Invacare 2017 First Quarter Conference Call and Webcast. After the management overview, we will open the call to questions. Investors and analysts interested in asking questions will need to dial in as questions cannot be submitted via the webcast. For the first part of the call, all phone lines have been placed on mute. This conference is being recorded, Tuesday, May 09, 2017. I will now turn the call over to Lara Mahoney, Invacare's Vice President of Investor Relations and Corporate Communications. Please go ahead.

[Lara Mahoney:]

Thank you, Dana. 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. Today, we will be reviewing our first quarter 2017 financial results and providing investors with an update on our transformation. To help investors follow along, we have created slides to accompany this webcast. For those dialing in, you can find the link to our webcast on www.invacare.com\investorrelations. On our Investor Relations page, you will also find a PDF of the webcast slide presentation that we'll refer to during today's call. Before Matt begins, I’d like to note that during today's call, we will make forward-looking statements about the company that by their nature address matters that are uncertain. Actual future results may differ materially from those expressed in our statements today due to various uncertainties, and I refer you to the cautionary statement included on the second page of our webcast slides and in our first quarter earnings release and 10-Q. For an explanation of the items considered to be non-GAAP financial information that will be discussed on today's call, such as free cash flow, constant currency net sales, adjusted earnings and loss and EBITDA, please see the explanatory note in the appendix of our webcast slides and in the related reconciliations in the earnings releases posted on our website. Also, please note that the company completed the divestiture of Garden City Medial Inc. in the third quarter of 2016. GCM is included in the 2016 results that will be discussed on the call, unless otherwise noted. With that, I will now turn the call over to Matt Monaghan.

[Matt Monaghan:]

Thank you, Lara, and good morning. As Lara mentioned, our company is undertaking a comprehensive transformation that is essential to reinvigorating our growth and profitability. We are in the process of making subsequent changes to our business that will affect results. The highlights from the first quarter include producing net sales of less accretive products and overall sales declines moderated from fourth quarter. Our new core of North America mobility and seating products grew, Europe and Asia Pacific had constant currency growth, consolidated gross margin as a percent of net sales increased as a result of our more clinical mix of products. We launched several new clinical products and programs and to the first quarter we made further progress on our quality systems which was off to completing important consent decree milestones in April. Before we discuss the financial results for the quarter, I would like to go to 2 slides quickly to align new investors and callers with what our company does and the reason for our transformation. Looking at Slide 3 from our webcast presentation, you will see that our company makes products that help people move, breathe, rest and perform essential hygiene and we focus on areas of congenital acquired and degenerative condition. These are important parts of care from people with a range of challenges, from those who are active in heading to work or school each day and may need mobility or respiratory support to those who are careful of long term care settings, at home and in rehabilitation centers. For decades, Invacare has been a leading global durable medical equipment company serving customers worldwide by providing the broadest portfolio of products to our customers. As a result of external challenges like reimbursement reductions from payers to our U.S. customers, and internal challenges by the consent decree that affects some of our Elyria, Ohio campus, we concluded it was no longer feasible to follow as one-stop shop strategy. So, starting in mid-2015 and continuing to 2016, we made substantial changes to our company's strategy. Since making this change, we have focused our resources on providing clinical solutions for complex rehabilitation and post-acute care and we have decreased the company’s emphasis on products with less sustainable value. This leverages the best of what Invacare has long done and eliminates the dilutive part of the business bringing alignment of resources focused on patient centric solutions to significant healthcare needs. To get to that result, we have divided our transformation programs into three phases as you will see on Slide 4, beginning in 2015 and taking us through the next several years. This is a basic crawl, walk, run kind of program. In the second half of 2015 and throughout 2016, we did much of the heavy lifting of Phase 1 in North America. We have retained and attracted new talent to our sales force. We have a pipeline of great new products and programs some of which I’ll discuss later and we recently achieved important milestones on our consent decree which demonstrates our commitment to building a quality culture. By the end of 2017, we expect to see results from our Phase 1 investments. As we shift to Phase 2 in 2017 and 2018, our main focus is on continuing to build culture of quality efforts, growing sales and making cost improvements and efficiency gains. Now the first quarter results, on Slide 5 we will see results for the first quarter 2017 compared to the key financial indicators of Phase 1 and Phase 2 that we preferred to in our presentation. As in much of the medical device industry, we are often rewarded for solving more clinically significant issues with better returns and it’s difficult to have the same infrastructure to design and produce very simple products and very complex products at the same time. So we have elected to reduce revenue in short-term in order to reduce less strategic business and bring focus on growing part of our business that provides more value in rehabilitation and post acute care. As a result in the first quarter consolidated constant currency net sales decreased 4.4% excluding the Garden City Medical business that was sold in the third quarter last year. Constant currency net sales increased for Europe and Asia-Pacific segments but were more than offset by declines in the North America HME and the IPG segments where the transformation is most intensive. As a result of the strategic shift to more clinically complex products, gross margin as a percent of net sales increased 180 basis points. Gross margin is an important measure of what we’re monitoring closely to ensure commercial and product effectiveness. It was good to see this increase in the first quarter after the last two quarters of flattish gross margin with sales decline an increase R&D cost. Gross profit decreased $2.7 million to $65.1 million with the Garden City Medical divestiture coming for $2 million of that decline. With still decline in each segments gross margin for the first quarter improved compared to prior year. In the North America HME segment which has been significantly impacted by the transformation of gross profit dollars and gross margin as a percent of net sales sequentially improved from fourth quarter of 2016 to first quarter of 2017. Excluding foreign currency translation and the divested Garden City Medical business, SG&A increased $1.9 million or 2.7% in large part due to unfavorable foreign currency transaction. During the first and second phases of transformation, we expect free cash flow to be negative as a result of investments we’re making in the business. In the first quarter free cash flow was negative $33.4 million compared to negative $40.2 million in the first quarter last year. The free cash flow dream was driven by the net loss and increased working capital which we typically see in the first half of the year. Historically the first half of the year has been seasonally almost cash consumptive period. EBITDA in the first quarter was negative $7.1 million compared to negative $1.4 million in the first quarter of 2016. The decrease in EBITDA was impacted by lower net sales, increased restructuring costs related to previously announced actions in January and unfavorable foreign exchange. And while not noted on the slide, adjusted net loss per share was $0.47 compared to $0.26 for the first quarter of 2016. The increase in adjusted net loss was driven by lower net sales increased restructuring costs and unfavorable foreign exchange. The company incurred net interest expense of $4.4 million in the first quarter of 2017 compared to $2.3 million in the first quarter of 2016 primarily due to the company's 2016 convertible debt issuance. We want to compare what we've done in the last year or so to what we said we would do so we continue to plan our recent quarter with the prior quarters since the transition start. If you turn to Slide 6 of the presentation this is due ratio say ratio page. On the page you can see sequential and year-over-year trends. Here we see the first quarter sales decrease as we discussed but less than in the fourth quarter. This is in line with our expectations of shallowing the decline in revenue. The gross margin as a percent of net sales we're looking for improvement from mix shift. In the first quarter we once again see this metric improving. This is good to see after a few weaker quarters related to choices we made to progress consent decree remediation and discontinue certain products. Gross profit dollars as we talked about over time are somewhat variable that’s the result of the titration in what we are decreasing and the new business we’re building back. With constant currency SG&A you can see the reflection of the investments we’ve been making and free cash flow negative, but improved compared to the first quarter last year. As we’ve discussed, this is a significant renovation of our business and looking at these composite metrics over the past six quarters, we see how this transformation is not a straight-line walk to the goal and that every quarter has mapped up perfectly to our expectations. For example, gross margin shifts were delayed over the last two quarters of 2016 as we need investment and remediation in new products which choose to be more portfolio turning in the fourth quarter last year and the respiratory disease hasn't come back after competitive bidding as much as we had expected. But overall, we believe we are moving the business to expected outcome of this multiyear transformation. I’ll now turn the call over to Rob Gudbranson our CFO to discuss the performance of the segments and additional financial results for the first quarter.

[Rob Gudbranson:]

Thanks Matt. Turning to Slide 7, all comparisons are with respect to the same quarter last year unless otherwise noted. For the first quarter 2017, Europe constant currency net sales increased 3.2%. The improvement in constant currency net sales was driven by mobility and seating products partially offset by declines in respiratory and lifestyle products. In the first quarter operating income decreased by approximately 0.9 million primarily related to unfavorable foreign exchange, an increase SG&A expense partially offset by increased sales, favorable sales mix and reduced warranty and freight cost. Gross margin as a percent of net sales increased slightly, while gross profit dollars decreased by 0.2 million compared to the first quarter last year. For the first quarter, North America/HME constant currency net sales excluding the divested Garden City Medical business, decreased 14.7%. The decrease in constant currency net sales was driven by lifestyle and respiratory products and to a lesser extent mobility and seating products. As part of the company's focus on clinically complex products, we discontinued consumer power wheelchairs in the fourth quarter 2016. Excluding consumer power wheelchair net sales from the first quarter of 2016, constant currency net sales of mobility and seating products would have increased for the quarter compared to the same period last year. Operating loss increased by 3.0 million primarily related to net sales decline partially offset by favorable sales mix and reduced warranty and freight expense. The first three months in 2016 included 0.8 million of operating income for Garden City Medical. Gross margin as a percent of net sales increased by 220 basis points and gross profit dollars decreased by 3.1 million compared to the first quarter last year. Excluding Garden City Medical, gross profit dollars decreased by 1.09 million. Constant currency net sales in the IPG segment decreased by 10.3% across all major product categories. Operating earnings increased 0.5 million primarily related to reduced SG&A expense, and warranty and freight costs partially offset by net sales declines. Gross margin as a percent of net sales increased by 270 basis points and gross profit dollars increased slightly compared to the same period last year. For the first quarter 2017, Asia-Pacific constant currency net sales increased 15.9%. The improvement at constant currency net sales was driven by the Australian and New Zealand distribution businesses, as well as the company's subsidiary that produces microprocessor controllers. For the first quarter, operating loss improved by 0.3 million primarily related to increased sales, favorable sales mix partially offset by increased R&D costs. Gross margin as a percentage of net sales increased by 60 basis points and gross profit dollars increased by 0.2 million compared to the same period last year. Turning to Slide 8, total debt outstanding as of March 31, 2017 was 182.6 million. The company's total debt outstanding consisted of 150 million in convertible debt and 32.6 million in other debt principally lease liabilities. The company has zero drawn on its revolving credit facilities with availability of 42.0 million as of March 31, 2017. The company's cash balances were 76.8 million as of March 31, 2017 compared to 124.2 million as of December 31, 2016. The company’s cash balance has declined primarily due to free cash flow usage and the required repayment of the remaining 13.4 million in aggregate principal amount of convertible debt issued in 2007. As of the end of the first quarter, day sales and receivables were 44 days, up from 41 days at December 31 2016, and down from 47 days as of March 31, 2016. At the end of the first quarter, days end inventory were 71 days as compared to 65 days as of December 31, 2016 and March 31 2016. I'll now turn the call back over to Matt for additional strategic comments. We then can address questions.

[Matt Monaghan:]

Thank you, Rob. As we've noted previously by the end of 2017, we expect a sustainable churn in both sales and operating income as a result of our transformation investments and activity. In the first half of the year, we expect continued lower net sales offset by favorable sales mix and increased gross margin as a percent of net sales. As you can see on Slide 9, we're already making progress on Phase 2 objectives, launching new clinical product platform as an important component of our transformation, and we’ve a full pipeline schedule to launch in 2017 and beyond. I'd like to highlight a few of the new products that we launched in the first quarter to demonstrate this. In February, the North America HME business launched the Swiss line of Kuschall active manual wheelchairs in the United States which brings a whole new line of lightweight high-performance wheelchair products to the U.S. active manual segment. Kuschall has long been an innovator, mixing great performance, lightweight material and attractive design. This is important launch reenergizing our custom manual wheelchair portfolio in the U.S. market. In March, our Alber electromotive subsidiary continue to launch market-leading power add-on innovations with the recent cruise mode upgrade to Alber Twion devices. This upgrade can be activated over the user's smartphone. Now with one push, the wheels will activate and maintain constant speed based on users input. Cruise mode is a great feature for active users who want to travel longer distances, skate up hills, or reduce the physical stress of moving and as Twion gets the ability to intuitively change directions, stop on command. In March, we showcased these new rehabilitation products to many more at the international seating symposium in Nashville. By essence, it’s the largest complex rehabilitation trade show in North America. We received great feedback from our clinical customers about our strong presence at the show, from both new products and integration of all our rehabilitation businesses into one portfolio. In addition to the momentum building within our rehabilitation team, we’re making progress renovating our post-acute care commercial organization. The post-acute team recently launched outcomes by design which is a program created to help long-term care facilities, improve clinical, financial and patient satisfaction outcomes. This is another demonstration of our new growth go to market strategy. We’ve integrated our solutions for safe patient handling, facility design, and pressure management through this consultative summer program that will connect Invacare's newly trained post-acute sales force with the key leaders in our customers organization responsible for healthcare outcomes. Beyond these products, we also recently achieved important milestones related to the consent decree at the corporate and Taylor Street facilities in ELYRIA, Ohio. First, FDA has reinstated our ability to design new products at corporate and Taylor Street facilities. This is called certification-2. And we've been working to achieve this important milestone and move forward to a broader restoration of the business. Certification-2 has particularly important as a positions for us to launch our latest power wheelchair platform, the PDF SP2 in North America from the Taylor Street facilities later this year. The PDF SP2 which has been available in Europe will launch in North America with our new link wirelessly programmable power wheelchair control system. This product will be a great asset for our power wheelchair portfolio. Any acceptance of this report also allows us to move forward in the third certification in consent decree process. FDA accepted the third-party expert certification-3 report which was submitted in February, 2016 as well as our own report which was submitted last month. The combination of both of these reports being submitted puts us in a position for the necessary FDA inspection to begin later in May. I cannot underscore how much time, energy, and focus has taken to get us to this critical point for the company. It’s been a long time coming, but since I arrived and with a help of our new leadership team and the hard work of many associated we've made establishing of quality culture our number one priority. It' now our sustainable part what we do. While we’re very pleased with our progress it’s important for listeners to know that we cannot predict the length or outcome of the inspection nor any remaining work that maybe needed to meet FDAs requirements for resuming full operations at the impacted facilities. We’re glad to be at this point and we look forward to demonstrating our progress with FDA. As we move forward, we’re continuing to focus on opportunities to reshape the business for cost and efficiency around our new sales level. We also remain focused on the execution of our new commercial organization that’s an area we evaluate daily. We see progress as evidence by first quarter growth in net sales of the new core of North America HME mobility and seating products and by the behind the scenes activity in terms of customer engagement. In the first half of 2017 we expect lower net sales favorable sales mix and increased gross margin as a percentage of net sales. As we progress through the next phase of transformation we will expand the scope of what we’re doing to include a heavier emphasis on growing sales, reducing costs and improving efficiency. Our priorities remain emphasizing the culture of quality excellence and achieving our long-term earnings potential. Because of the scope and magnitude of the changes we’re making as well as the realized and potential changes affecting the business we caution investors to expect some variation at the timing of these results. However, we remain confident in the earnings potential of the business and our ability to get there. We appreciate the continued support of our shareholders and associates through this process, we’re confident in our strategy to rebuild this business to be a sustainable leader in our markets. I want thank you for taking the time on the call this morning. And I think we have time for questions

[Operator:]

[Operator Instructions] We'll go first to Matthew Mishan with KeyBanc.

[Matthew Mishan:]

Good morning Matt, Rob and Lara and thank you for taking the questions. First off congratulations on the all the progress you've made towards the consent decree over the last several months. I know as FDA acceptance of Phase 3 you're not stopping your quality efforts, but what - does it allow you to start shifting resources elsewhere at this point?

[Matt Monaghan:]

The decisions that we've made focus on quality excellence in the past we've taken to get there Matt have really allowed us to do one big important thing for sure and that's be more effective in everything we do in the product portfolio. We've chosen to move forward with fewer products and products that have more sustainable value, but because we’re underpinning it with new processes and procedures that are not only fully compliant but efficient you get to have a better more vibrant portfolio that’s sustainable for roughly the same percent of sales into R&D that’s probably the biggest outcome. It’s like good recordkeeping anywhere and good procedures you may have, the better that you do everything the lean procedures and buy less they were point you’d affect it just makes everything work better.

[Rob Gudbranson:]

Matt I’ll just add one thing the quality cost for North America has been coming down. So it won't a whole lot of massive improvement on stating a lot more to lay there, but they’ll run mass point I think the best it is, we've had a lot engineering talent focused on DHF remediation that’s going to continue to focus on that. It’s very important that we have those things in right position but I think they’re going to work a lot more on new products and helping us with the future.

[Matthew Mishan:]

Okay, it's great. And then can you give us some context around the increases in mobility and seating excluding the consumer power wheelchairs. Are you seeing the benefit that you expected from the investments you’ve made in the sales force?

[Matt Monaghan:]

Yes in the sales forces and also yes in the integrating what the sales forces worldwide sell from all our subsidiaries and that previously as well organized as it is today but today not only do we have well cost on sales force, but folks can walk into a clinical setting and look at a broad range of needs of an end user and work with our providers to bring more novel important values and care not only in power wheelchairs but passive manual wheelchairs. It all starts with seating and positioning to make sure that’s there is good posture management and trump control and things like that at the end user. And then lots of interesting additions with Alber's power ad that help highly active people be even more active with novel products and light weight design to attending controls for a caretaker to be able to easily care for let’s say large size passive patients. Both the combination of good sales force that’s coming up to speed and better integrated products across all our subsidiaries has really helped we’re pleased with that. And then we’ve got a portfolio of launch in 2017 that’s bigger, bigger than the company ever had in the year.

[Matthew Mishan:]

Maybe without quantifying, what it's outdated, up is it up little bit mid single digit - if you can give any kind of context on really what it's up excluding the discontinued shares?

[Matt Monaghan:]

Yes we’ll bring up the quantitative so I appreciate you've given me a little room to answer that without being too specific. It’s up in the beginning of what we think it’s going to be a long-term growth in that segment. So I would say it’s kind of on the small end of being up, but it’s clearly up in the places we want to focus.

[Rob Gudbranson:]

And Matt I just add one other thing, when we’re going through all that discontinuation all those efforts it takes a little bit of time to reset the customers, and reset everybody on the back it’s a little bit different portfolio. So I agree in Matt's qualitative indication range and the answer is ultimately, ye there's some other things the sales force has that focus on during that time period.

[Matthew Mishan:]

Okay, perfect. And last question before I jump back in the queue, just some early takeaways from customer trials of the new portable oxygen concentrator if possible?

[Matt Monaghan:]

Sure still really excited about that product great output, great quality, great form factor, noise, weight, battery life, output all those things very robust design. Looking back I think we probably got it out a little later than we should have to take full advantage of the winter season but still great response for customers as we talk about before for everybody’s benefit the process of getting it into big fleets takes a while because you get a small trial might last a quarter more there's evaluation of the feedback and then ultimately it feeds it way into future purchases. So we look forward to continue growth of that product. It’s really exciting, it’s a nice innovation of a platform or a portfolio that's really broad, we bring value to respiratory customers for stationary needs and non-delivery forms and this is the first step of up beating that portfolio that will continue to do.

[Matthew Mishan:]

All right, thank you very much guys.

[Operator:]

We’ll take our next question from Chris Cooley with Stephens.

[Chris Cooley:]

Thank you, good morning I appreciate you've taken the questions. If I may could you just may be characterize for us a little bit more of the progress you're seeing on the IPG front with the sales force transition there realize we’re in the basketball playoffs right now but maybe we could talk a little bit about maybe from an inning perspective where you see that progression. And then I had a quick follow-on after that?

[Matt Monaghan:]

Sure so IPG is a segment that really focuses on institutional products and much of that business is a lumpy and long-term big projects either new constructions or renovation. We of course look forward short-term needs short-term like 24 hour arrival of a new patient resident who needs certain products so he doesn’t have so we can easily rush those things up but the proponent for the business is longer term in nature. So the good news is while we probably didn’t have our eye on the ball on that business the way we should have before second quarter 2016 that nurse carries that far. But since the second quarter of 2016 we really rebuilt that organization sales team, corporate account managers as we announced last month new services like happens by design that really align our products with the clinical needs that residential operators need to make sure that outcomes are great. So the good news is we’ve got some vibrancy there while we had a legacy benefit of the inertia of that business. We also had the inertia of building it back we think that will take a couple more quarters but we look at the backlog of business and customer engagement and who we’re getting to meet with it's really very positive but it’s the capital cycle. So you got to get in there and get funding taken forward. Please with it may be for you to specifically answer your question it’s maybe fifth inning little after half.

[Chris Cooley:]

It sounds good and maybe just quickly from a balance sheet perspective may be for Rob then if we look at the increase in inventories there both sequentially off of the calendar year end and not year-over-year. How much of that and I apologize if you addressed this in your prepared remarks, but how much of that increase is a function of just the transition that you're seeing right now versus maybe any type of a shift that you’re seeing in the end markets?

[Matt Monaghan:]

A couple things Chris so first we didn’t address it in the prepared remarks so glad to answer it now. As we said in the prepared remarks, we’re 71 days compared to about 65 at year end, 65 at the similar time March the last year. Then increased from our advantage point driven in a large part by the fact that we had some organic sales decline. So again, we had the inventory for a little bit stronger plan, but then I would also say from our advantage point, we have a sort of a mix between products. So it's related to some [indiscernible], we saw some ability exceeding for the entire consumer power show increase in North America. We had some weakness from lifestyles in respiratory. So little weakness there. I think the answer is what will work through this, but we got to be somewhat cautious in the first quarter, and we got to get some activities in place, get to the point that we start to see the days come back down. So we’ve got work to do there.

[Chris Cooley:]

If I may, just one quick follow on to that. I guess really where I am going with that, is just from a working capital perspective, is it management's perspective that it's prudent to may be a little bit heavy on inventory here in the short run, just a little bit volatility around predicting the business here in kind of this interim phase and then start to draw that down as we look into the next calendar year. Or should I expect some improvement in that? And then as a result, contribution of cash as we exit the calendar year.

[Matt Monaghan:]

We’ve discussed before even on the Q4 call that the movement in inventory in 2016, which was pretty dramatic in terms of use of cash, was not where we wanted to be. In 2017, without specifically talking about quarters, our goal is clearly get a better spot with inventory. There might be more back half than front half but, Chris no, we’re not trying to be in a position, 71 days is not where we’re being cautious as just there’s more activities to take. The North American team and the Europe team are very focused on this going through the rest of the year.

[Rob Gudbranson:]

There was also good point, Rob. In Europe, we have lots of opportunities. In fact we're focused on to increase the velocity of inventory that’s important. It's around operational efficiency in North America as we’ve continued to decline the lifestyles business. We typically had trailing inventory balances as we wanted to have inventory to match with customer's wants. And once we see how things settle out at new price points, then we move through that inventory in subsequent periods of typically trailing, but we’re definitely focused on working capital this year.

[Chris Cooley:]

Understood. Congratulations on the progress. Thank you.

[Operator:]

We’ll take our next question from Bob Labick with CJS Securities.

[Bob Labick:]

Good morning, and my congratulations as well on the significant milestones reached and the nice start to 2017. So want to start with the transformation and we've discussing this a little bit, but how far down the path are you towards calling the lower margin products in North America? With the consumer power wheelchair, there’s obviously going to be a comp for the rest of the year against that. Are there other major things to come out or are you mostly done, or how should we think about where you are in terms of the calling process.

[Matt Monaghan:]

We’re looking to see this revenue line continue to flatten out through the year. We’ve talked about first half continuing to see sales declines and there’s still some areas in the lifestyles business that we need to prune. It’s not major compared to what we’ve done historically, but that’ll continue to happen and then we want really to end 2017 with traction from this new commercial team that’s set up well between their own skills and customer call points and the portfolio of new and existing products. So this is really the turn here.

[Bob Labick:]

Got it. And then in terms of new products, you’ve discussed some of the new ones that you’re launching. How long does it take generally to gauge the success of new products, and how do you determine if they are successful?

[Matt Monaghan:]

Yes, it depends by product as you’d imagine. So on the respiratory side, something like the new talk it's one product in a big portfolio. So, it’ll take time to grow to a material size where we can talk about it externally or leave the flag. I think short lead on that product is great features, it's great form factor. We’re meeting the marketplace, so now it’s a matter of just getting in the people’s fleets. As I mentioned in my prepared remarks earlier, I guess if everything had been perfect, we probably would have preferred to have this out a little earlier to get full advantage of the winter season. So now we’re going to see this and we expect to build through the summer season and then further up to next winter as well. So that’s kind of a little bit longer cycle. Then on the power wheelchair side or the wheelchair side, like with Kuschall which we launched or the TDX SP2 with length that we’re going to launch. As soon as those products are launched, they’re in the hands of our sales team immediately that day or at that point in time and then you’re faced by the extent that we're in clinical settings with new patient in need of assistive technology. The quote cycle on those is 30 to 90 days depending on how big the request is and what the payer review process is and what the pre-approval cycle looks like, pre-audit the CMS is working through. So you kind of have 30 to 90 days on quote. We can typically move up from a quote to an order, shipped and build in less than two weeks after less than less than one week. And then you have that 60ish days of receivable beyond that. So we're really just paced by how quickly we can get in a clinical setting to show those. Outside that's kind of a North American answer. Outside North America, it’s often based on tenders, or I should say, outside the United States, it’s based on tenders. So you may have a great product on a day, but if you just missed a four year tender, you might have to wait a while. If you just get into a long-term tender, then that’s an immediate opportunity, which typically has some loaded sales. So, it’s kind of a mix and those differences are blended into our sales along the way.

[Bob Labick:]

Okay. Great. Thank you. And then moving on to the consent decree and everything there, assuming a positive resolution in inspection, I understand you have no way of gauging how long that may take or what the outcome would be, but let’s just assume a positive resolution. What is the market for custom power wheelchairs like now versus five years ago when the consent decree began? And what is the process of regaining your market share?

[Matt Monaghan:]

Yes. Good question. So, the market is probably a little bit bigger based on just population growth with the same incidence rates. So we use that simplifying assumption and pricing is relatively the same, although competitors are really good in that marketplace, and they’ve obviously taken the share that Invacare once had. So it’s a matter of going against a very competitive competitors in these clinical setting, and seeing patients. Now, we have great features coming out in TDX SP2. I can’t talk exclusively enough about the benefits of this wireless programmability which are great for end user because they’re going to end up with a better program to control. It’s going to be easier in the clinical setting to get to that situation. It’s easier for the clinician. The whole experience is better. And then for our providers, they have remote diagnostics and more predictive service calls, which lead to customer satisfaction and better productivity for service team. So, it’s really better, better, better. It fits into the seam reimbursement scheme that’s out there today. So we’re really looking forward to that. So then the question is once we get into the clinical settings and that product is launched in third quarter, how quickly is the uptake based on that quote where it's shipped in the cycle.

[Lara Mahoney:]

And the good news too, Bob, is that we’ve been rebuilding our rehab sales force as part of the transformation over the past several years. So our rehab specialists are in the facilities. They’re talking to our customers. We have a lot of other great products that we sell in addition to the TDX product with a BMN. So the relationships are being built, and we’re in a very good position compared to where we were a few years ago to be ready for getting out of the injunctive days.

[Matt Monaghan:]

And strong provider interest, they're great partner for us worldwide. So, we’ve been showing the features of the product since the IFS Show in March, and we continue to have good engagement with our providers on bringing that to market. Looking forward to it.

[Bob Labick:]

Great, thank you very much.

[Operator:]

[Operator Instructions] We’ll go next to Jim Sidoti with Sidoti & Company.

[Jim Sidoti:]

Good morning. Can you just remind me how long it took the last time, the FDA came to do an inspection? I believe that was for the Cert-2 inspection.

[Matt Monaghan:]

In 2015, the FDA was in the facility evaluating records for approximately five months. So, I don’t know if that’s exactly a benchmark for the next five order. It’s a bigger scope. But the FDA is familiar with the scope through a third-party report. So it could be longer, it could be shorter. So it’s difficult to predict.

[Jim Sidoti:]

All right. As far as cost go, I understand that a lot of the people who have been working on quality can now be moved on to other projects. But there were also some external cost that you paid in this process. Can you just give us a ballpark on what that is and how those fall off?

[Rob Gudbranson:]

We typically talked about the quarterly cost of quality. In this quarter, they were $2.9 million. So substantially down from around kind of $12 run rate, which is down from -- I think last year it was in the 60-ish area. And the consultants are essentially gone. So those cost are specialized cost that are kind of one time in nature based on what cost were accounted for at the beginning of the consent decree. And as Rob mentioned in his prior comments, a lot of the work lately has been from our internal payroll folks, engineers, for example, working on design history files who hit some productivity back on that team in terms of developing new products as we go forward. But I think we've continued to demonstrate that specialized cost is coming down. It won’t go to zero as we’ve talked about in the past because obviously we didn’t have the rate base line to start. This product certainly wouldn’t have a consent decree probably. So I’m not sure how much lower it will go. But the benefits of even that sustained cost in that income statement should be reflected in other benefits like lower warranty cost, cost to serve customers satisfaction, share those kinds of thing.

[Matt Monaghan:]

And Jim, I only thing I would add to that is, when I think about that 2.9 million we spent in the quarter, the reason why that's come down so dramatically over time is I think the company has done a very good job of getting off of the external support from consultants which to be blunt, they don't quite have the same ownership as you have internally. I think we built up the team internally that is going to support complaints cap or whatever, whatever key focus that we need to have. So again, to Matt's point, there might be some room there, but a lot of that now is headcount and associated who won it as opposed as spending money externally.

[Jim Sidoti:]

All right. And this is a follow-up to the last question, on the last analyst question. But your dealers have been working with other supplies for the past five years now. You're going to come in the market hopefully sometime in the next 12 months. What's your strategy to convert some of these dealers back to Invacare?

[Matt Monaghan:]

Well, first of all we need to give the dealers something that makes sense for them economically and in driving share in the local markets to help patients. And I think the good news is, the portfolio we have has continued to be strong. The products that we've eliminated have less clinical value for those providers. And this new link system is really unbelievable. It’s kind of like going from a flip phone to a smartphone in terms of incremental features and benefits and the ability to grow that platform in the future, which helps both the end-users. So the provider can go into a clinical setting and show that they are a top-notch high-tech island guard provider that’s nearly going to help the end-user, and then themselves, they've got better cost to serve through remote diagnostics and remote service fees on those products. So our strategy is to make sure that our providers know what the features are, they get familiar with those as the products come out. They've got to be market competitive on price, that’s important and we’ve got to have the right commercial coverage globally which I think we do with the sales places we have. And along way, as we’ve talked about, we've got demos going out into the field. So everybody can see these products and try them out in the clinical setting.

[Rob Gudbranson:]

Jim, only thing I’ll add, and I think we’ve said it all earlier, but I’ll just reinforce it. We’ve got a good strong sales force out there going today. They're out there just selling the rolling, they’re out there selling that TDX SP today. It’s going to be immensely, but it’s not as if we don’t have other products including Alber products that were out there pushing. So I just want to make sure we don’t leave them pressing that we’re somehow going to show up and figure out where the provider is located or try to explain to them who Invacare is, or that we’re just showing up again. The answer is we're dealing with them every day today. I'm not saying it’s going to be easy. We're going to have to get there in their system and quotes and orders. It’s going to take time. No one is going to hand us the market share, but it’s not like we’ve got a bunch of sales people figuring out where the key providers are located.

[Jim Sidoti:]

And how many of these sales people employed today were around five years ago before the consent decree was put in place?

[Rob Gudbranson:]

We don’t have the number exactly, but maybe half.

[Jim Sidoti:]

Okay, thank you.

[Operator:]

And at this time, I’ll turn the call back to our speakers for any additional or closing remarks.

[Matt Monaghan:]

Thank you, Dane, and thanks everybody for your time and attention during today's call. We continue to drive progress on the sizeable renovation, we’re confident in the potential of our segments, our pipeline and new products, and we’re continuing to make progress on a quality milestone. At time we have been varying somewhat along the way, we believe the company's earnings potentially will remain strong and we look forward to delivering on that. Rob and I are available for any follow up questions. Have a good day.

[Operator:]

And that does conclude today's conference. Thank you for your participation. You may now disconnect.